Investors who bought into bonds this year, lured by the promise of a rebound after last year's historic losses, have seen disappointing returns. Global bond markets have lost 1% this quarter, following a 3% gain in the first quarter. This means the asset class has not delivered on its promise of a strong rebound after the Bloomberg Global Aggregate index lost 16% last year. Jim Bianco, president of Bianco Research, noted that investors betting on falling inflation and an impending recession are "up to their eyeballs" in bonds, and it has been a "painful bet." Over the past five to six weeks, many have seen their performance negatively affected.
Money managers, including JPMorgan, Pimco, Charles Schwab, Fidelity Investments, and Amundi, had declared "bonds are back," leading to significant inflows. Nearly $113 billion flowed into taxable bond funds in the first five months of 2023, a stark contrast to the $107 billion of outflows in the same period last year. Investors were seeking high yields and betting that the cycle of interest rate increases from the Federal Reserve and other central banks was nearing its end.
However, these bets have proven problematic for investors who bought short-dated government debt, which is highly sensitive to interest rate outlooks. The two-year Treasury yield recently rose to its highest level in three months after Fed chair Jay Powell indicated that the fight against inflation was not over. Jason England, global bonds portfolio manager at Janus Henderson, noted that those who piled into short-duration rates at the beginning of the year are likely "feeling some pain, because rates have continued to move higher."
Outflows of $763 million have been observed from short-dated government bond funds in April and May, according to Morningstar data. Inflows into the broader taxable bond fund category have also slowed, from $71 billion in the first quarter to $42 billion in April and May. Some investors are opting to sit in Treasury bills and government money market funds, which offer attractive yields, rather than longer-duration fixed income, according to Alex Obaza, a portfolio manager at T Rowe Price.
Despite the lacklustre performance, many fund managers remain confident, arguing that higher yields provide a margin for error, allowing for positive returns even with modest price drops. Greg Peters, co-chief investment officer at PGIM Fixed Income, highlighted that the cushion afforded by chunkier yields is "the story of bonds ultimately," and he feels "much, much more comfortable owning bonds today than I did in 2017" when rates were near zero or negative and spreads were tight.
