Bonds are on the brink of a bear market as investors brace for Fed's largest rate hike since 1994

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Bonds are on the brink of a bear market as investors brace for Fed's largest rate hike since 1994
Bloomberg's Global Bond Index is down 19.7% from its January 2021 peak - meaning its nearing bear market territory.REUTERS/Susana Vera
  • Global bonds are nearing a bear market, slipping 19.7% from their January 2021 peak.
  • Investors are readying themselves for the June Federal Reserve meeting.
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Global bond prices are nearing bear market territory as investors ready themselves for the Federal Reserve's June meeting, when the US central bank could hike interest rates by 75 or even 100 basis points.

The Bloomberg Global Aggregate Index, which tracks returns from both government and corporate bonds, is at $449.55, meaning it's slipped 19.7% from its record high of just under $560 in January 2021.

Expectations of a hawkish Fed are driving the fixed income sell-off. Borrowing becomes more expensive when interest rates rise, causing bond prices to fall. Yields on the 2-year Treasury note, which is the most sensitive to interest-rate expectations, have risen

Friday's US CPI number came in surprisingly hot, with inflation hitting a 41-year high of 8.6% in May. Investors are now expecting the Fed to hike rates aggressively as it tries to tame soaring prices.

"To say the bond market didn't like Friday's consumer inflation report would be an understatement," Lawrence Gillum, a fixed income strategist at LPL Financial, said.

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Yields, which move in the opposite direction to prices, have moved sharply higher since the latest inflation data was released. On Monday, 2-year US Treasury yields had risen by almost basis points over the two trading sessions - a larger move than the two-day jump that happened after Lehman Brothers collapsed in September 2008.

Bonds' struggles come during a broader sell-off across asset classes. Bond prices usually rise when stocks fall - but right now the two assets are sliding in unison.

And there could be further pain ahead if the Fed delivers aggressive rate hikes in June, July, and September.

Barclays, Jefferies, and Goldman Sachs strategists are all anticipating the Fed will raise interest rates by 75 basis points at its Wednesday meeting, which would be the central bank's single largest rate hike since 1994.

Meanwhile, billionaire investor Bill Ackman, "bond king" Jeff Gundlach, and Wharton economist Jeremy Siegel have all called for the Fed to raise rates by 100 basis points.

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"The Fed needs to grab the narrative of inflation ... it knows it was way too late," Siegel told CNBC. "[It has] got to take its medicine now to get cured."

iShares' US Treasury Bond ETF, which tracks government bond prices, sank to an all-time low of $23.27 Wednesday. Their Investment Grade Corporate Bond ETF has plummeted 19.1% year-to-date, compared with a 13% slide in the government bond equivalent.

Read more: Bonds are having their worst year in four decades, but the head of global fixed income at JPMorgan Asset Management sees 3 opportunities in the market with a recession likely to hit in 2023

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