United States bonds are expected to yield investors the heaviest loss in more than 230 years, but according to a team of strategists at Bank of America, in early 2023 they are expected to reverse the trend – along with a new low in the stock sector.
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The team, headed by Michael Hartnett, looked at the last 250 years and concluded that the investor return on US bonds in 2023 “will almost certainly be positive”, as markets move from an “inflationary shock” to a super-bearish (uber-bearish) and “Interest rate shock” to recession expectations. In the past 150 years, there have only been four years in which both stocks and bonds produced year-end losses for investors (1941, 1969, 1987 and 1994). 2022 is on track to be the fifth and most extreme.
The global bond market is larger than the stock market. According to the International Capital Markets Organization (ICMA), as of the middle of 2020 it stood at approximately 128 trillion dollars. About two-thirds of this market are bonds of countries, and the rest of companies. The US government’s 10-year bonds are considered the standard. The report issued by the team states that the price of those bonds has fallen by 23% since the beginning of the year, and they are expected to reach a second annual loss in a row. The last time such a scenario happened was in 1958 and 1959, Hartnett said. According to the strategists, bonds in the United States have never gone through three consecutive years of losses – and after the last time a loss of more than 5% was recorded, somewhere in 1860, a positive return was recorded the following year.
According to Bank of America, 243 interest rate hikes took place around the world this year – about one per trading day – and they dictated the tone in the markets. In the US alone, there have been five consecutive interest rate hikes since March.
According to Hartnett, the bond market is now changing direction thanks to the policies of the banks in England, Canada and Australia. He told “Market Watch” that a “recessionary shock” is expected for the markets soon, which will lead to new highs in credit spreads and a trough in the stock market, probably already in the first quarter of 2023. Even if the current quarter ends with an increase, the forecast will remain unchanged.