What has happened to bonds?
2022 has been a difficult year for financial markets and especially for bonds. The asset class usually seen as a safe haven for investors is suffering only its second double digit decline since 1931 and marking a negative year for only the fifth time in the past 45 years. The traditional 60 – 40 equities to bonds portfolios have been wrecked as bonds didn’t offer any protection for declining stock prices.
The resolute hawkish monetary policy of central banks to crush inflation fuelled an upward spiral in rates that was particularly hard on bonds. It increased volatility in the usually calm bond market which led to significant downturns across the fixed income market. For certain categories of bonds, the losses were similar to those of the S&P 500 index.
The US Federal Reserve reduced its December rate hike by 25 bps to 0.50% and signalled it may reduce next year’s hikes if inflation and labour markets continue to cool. That is good news for bonds and will give investors some relief and belief that bonds can behave more normally in 2023. With more uncertainty lying ahead for stocks next year, investors could need the protection traditionally given by bonds.