The dollar’s role as dominant global reserve currency is at risk if the Fed fails to crack down on inflation.
We’ve seen the headlines in recent days. “Worst Bond-Market Drawdown on Record.” Drawdown means drop in prices. “Global Bond Market loses $2.6 Trillion,” was another one. This was based on the Bloomberg Global Aggregate Bond Index, which tracks total returns of government and corporate bonds. And this index of global bonds has plunged 11% from the high in January 2021, the biggest percentage decline in the data that go back to 1990.
The drawdown has now edged past the 10.8% drop in the global bond index during the financial crisis in 2008.
In the US, the bond market peaked in August 2020 and is now down 8.7%. The drawdown has lasted 19 months so far, the longest drawdown in the data going back to 1996.
Long-term bonds got hit particularly hard. We can see that in the iShares 20-plus Year Treasury Bond ETF, which tracks Treasury securities with 20 years or more in remaining maturities. And it being a Treasury bond fund, it’s supposed to be conservative and save. Its price plunged by 24% since the peak in August 2020.
But wait… don’t cry for bondholders. They had it so good for so long. The biggest bond bull market ever started in October 1981, when the 10-year Treasury yield peaked at 16%, and when the Volcker Fed was beginning to cut interest rates in large chunks after CPI inflation had peaked at nearly 15% and were coming down. That was the end of the worst and most brutal bond bear market anyone today can remember. And it was the era of the infamous double-dip recession.
What followed was the longest bond bull market that then turned into the bond bubble. In the US, that bond bull market, interrupted by some notable sell-offs, lasted 40 years, from October 1981 to August 4, 2020, when the 10-year Treasury yield closed at 0.52%, the lowest closing yield in history. That was the peak of the bond bubble.
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Verder lezen van deze transcriptie kan – onder de link – op Wolfstreet.
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