Bonds are sliding toward the first bear market in a generation, burning investors who erred in bets that central banks would pivot away from rapid interest-rate hikes.

The Bloomberg Global Aggregate Index, which tracks total returns from investment-grade government and corporate bonds, is within a percentage point of falling 20 per cent from its peak after another bout of selling following the Federal Reserve’s Jackson Hole symposium. 

The hopes of a dovish shift that drove a rebound through June and July have evaporated since Fed Chair Jerome Powell committed to higher rates for as long as it takes to tame inflation. Bond investors, who were already on shaky ground in recent weeks as policy makers flagged price pressures, face further risks from US payrolls data on Friday and inflation figures two weeks from now. 

“Powell’s comments on Friday reset expectations,” said Pauline Chrystal, a portfolio manager at Kapstream Capital in Sydney. “Our view prior to Jackson Hole was that the market was pricing cuts too early.”

It’s a particularly difficult environment for investors, with bonds and stocks sinking in tandem this year. MSCI Inc.’s index of global equities has lost 16 per cent so far this year on a total return basis. The Bloomberg bond gauge lost 19.3 per cent as of Monday from its record high in January 2021.

Powell’s hawkish stance has swaps traders now seeing around 65 per cent odds that the Fed will deliver a third-straight hike of 75 basis points when it meets in just over three weeks. Other central bankers at Jackson Hole, from Europe to South Korea and New Zealand, indicated that rates will continue to rise at pace.  

Surging energy prices, driven by both the impact of Russia’s invasion of Ukraine and the strains imposed by extreme climate events, are acting to keep cost pressures elevated around the world, even as they also weigh on growth. 

UK and German two-year yields -- the most sensitive to changes in monetary policy -- are poised to rise by the most on record this month as traders bet the Bank of England and European Central Bank will continue to raise borrowing costs in order to quell inflationary pressures.

The Fed’s accelerating efforts to trim its balance sheet are adding more weight to bond prices. Kozo Koide, chief economist at Asset Management One Co. in Tokyo, warned that Powell may take rates even higher than current market pricing suggests.

“Because wages are rising so fast, you can’t stabilize inflation around 2 per cent without boosting unemployment and causing a recession, even though the Fed can’t openly say so,” said Koide. He estimates that the Fed rate may go above 4.75 per cent if inflation stabilizes at around 3 per cent, given the central bank has estimated the potential inflation-adjusted growth rate is around 1.75 per cent.

Corporate bond spreads globally are also widening after the summer rally, and were higher again at the start of the week, a Bloomberg index shows. They have climbed for two straight weeks, the data show. 

“Any lingering hope of an earlier-than-expected Fed dovish pivot has been extinguished,” said Todd Schubert, head of fixed-income research at Bank of Singapore. “The movement wider in credit spreads globally is a result of Powell’s uber-hakwish Jackson Hole speech.”

Elsewhere in credit markets:

EMEA

Eleven issuers across 15 tranches were in the primary market on Tuesday, with a minimum placement volume equivalent to 10.79 billion euros (US$10.82 billion). That’s the highest tranche count since June 23, data compiled by Bloomberg show. On Friday, a euro-denominated senior preferred offering by UK lender Nationwide Building Society capped last week’s issuance activity, which amounted to more than the equivalent of 30 billion euros.

• The European Commission approved a plan to transfer bad loans guaranteed by the Italian government to state-owned asset manager Amco SpA, according to a report in Sole 24 Ore
• Nostrum Oil & Gas Plc got court approval for debt restructuring

Asia

China is set to ask companies planning to sell offshore debt with tenors longer than one year to get approval from the country’s top economic planning body, bringing greater enforcement to parts of longstanding guidance on overseas financing as concern mounts about dollar strength.

• The lowest August for dollar bond deal sales from Asia in a decade continued on Tuesday, as issuers kept to the sidelines amid rising borrowing costs in the US currency
• Still, Korea Electric Power has sent a request for proposals to banks for a potential issuance of dollar notes, a person familiar with the matter said
• Indian solar utility Azure Power Global Ltd.’s dollar notes slid to record lows on Tuesday after the firm’s chief executive officer Harsh Shah unexpectedly resigned
• Vietnam will tighten rules on bond issuance by property companies to curb speculation and rein in high real-estate prices it says are a threat to the nation’s financial market
• Indonesia’s bid to help the rupiah via “Operation Twist” has pushed the spread between long-dated and shorter corporate notes to the lowest in two years

Americas

US corporate debt markets weakened Monday after Powell last week reiterated the central bank’s plan to raise interest rates, creating a shakier backdrop for borrowing the rest of the year. 

• There will be few if any blue-chip new issues this week as deals traditionally are rare ahead of the US Labor Day weekend. New deals missed estimates of US$5 billion last week
• Outdoor grill manufacturer Traeger Inc.’s capital structure could become unsustainable if the company doesn’t record a swift improvement in earnings and operating performance, according to S&P Global Ratings
• US credit ratings deteriorated last week as the main ratings companies issued 30 downgrades and 17 upgrades