After a historically bad year for bonds, fixed income markets have their best start to the year in 2023, supported by higher yields, falling inflation and the traditional role of bonds recession paradise.
The Bloomberg Global Aggregate Bond Index rose 3.7% in 2023 through Thursday, after falling 16% last year. The S&P US Aggregate Bond Index fell 12% in 2022 and is up 3.1% since then. That compares with a 3.5% gain for the S&P 500 and a 6.4% gain for the Nasdaq so far this month.
- Bonds are off to their best start since their worst year in 2022.
- Investors were attracted by the higher yields and historical outperformance of bonds during the recession.
- Bond fund inflows so far this year follow record withdrawals in 2022.
- The yield on the 10-year Treasury note hit a four-month low last week amid weaker economic data and a rapid decline in inflation.
Investors strengthened their holdings of US bond funds for the second week since January 18. The week of January 11 saw the highest weekly inflows into global bond funds in 20 months. The pursuit of yield between junk bonds flipped the iShares iBoxx High Yield Corporate Bond ETF (HYG) to an exceptional position at the beginning of 2023.
Increased demand for bonds was enough to prop up prices even as governments and companies sold nearly $600 billion of debt, a record early this year.
Global bond and US fixed income markets have been rising since late October from the beginning of November in the middle multiple indication inflation is quickly disappearing from 40-year highs reached last spring.
Weaker economic data since December’s strong employment report contributed to the gains. The yield on the 10-year U.S. Treasury note, which moves inversely to price, hit a four-month low last week after disappointing monthly retail sales and industrial production numbers. layoff notice leading technology companies.
Another factor supporting the fast start for bonds was strong short-term coverage of government bonds by institutional traders. While this trend may not last, the reversal of last year’s bond resistance could prove more durable. Investors pulled a record $335 billion from US bond funds last year. While bonds returned an average of 4.5% annually, in the years following the 10 biggest annual fund outflows, they returned an average of 7.6%, according to BlackRock.