By Tom Burnett CFA
The global pattern of rising interest rates has punished fixed income investors in 2022. Looking at data from the WSJ.com website, it is apparent that negative returns are the normal result for global fixed income investors. Interest rates have risen in all major markets as central banks attempt to slow their economies and bring down inflation. In the U.S. markets, the yield on the Ten-year Treasury bond has risen from 1.51% at the end of 2021, to its current level of 2.96%. In mid-June, that yield rose above 3.3% before fears of a possible recession brought the yield down. Thus far in 2022, no fixed income market has been spared the negative return environment.
The Global Government Index return is negative 8.4%, but the Emerging Markets Index is even worse, at negative 18.4%.
In the U.S. markets, similar negative returns are evident. The long-term Corporate Bond Index is down 22.4% this year. The High-Yield Index is down 13.6%, while the Master Muni Index shows a 7.1% negative return.
Stocks have not fared well either. The S/P 500 Index is down 18.6% this year and the NASDAQ Composite has lost 26.4%. Higher interest rates have hurt the stock market returns since the dividend yield for the S/P 500 is only 1.7%, making it less attractive than alternative investments.
Commodities remain the most profitable asset category in 2022. The Bloomberg Commodity Index has risen by 15.4%, led by the energy sector with Crude Oil up by 36.1% and Natural Gas rising 60.1%. Food prices have also risen this year—wheat futures have increased 8.3%. Gold prices, however, have declined by 4.5% as higher interest rates increase the cost of carrying gold inventories and add to the attraction of competing investments. Commodity prices in the energy sector have recently backed off their highest prices which may provide help to central banks as they attempt to reign in the global inflationary pressures. Any relief on the inflation front could encourage central banks to ease off their rate increase actions which would clearly help fixed income investors as they navigate this difficult environment.