By Tom Burnett CFA
As bad and frustrated as equity investors must feel so far this year, the world of fixed-income investing is far worse. (The information on the returns comes from the April 28, 2022 issue of WSJ.com). There is no ‘safe haven’ in the fixed-income world this year.
The Index of International Bonds is down 7.2%, but Emerging Markets Bonds are down 15.4%. The Domestic picture is not much more attractive—the Muni Index is off by 8.1% and High-Yield Bonds are showing a decline of 9.1% so far this year. The Index for total bond ownership, including corporates, municipals, and Treasuries is down 9.5%. The Index for Investment-Grade Corporate Bonds is off 14.3%, reflecting the wide ranging sell off in the major corporate bond markets. The worst performing Index is the 20+Year Treasury group which is down a stunning 18.5% in 2022. By comparison, the 12.2% drop in the S/P 500 Index looks almost acceptable. Investors must deal with volatile equity and bond markets in the current environment with uncertainties based on rising interest rates, inflation at the highest levels in 40 years, and the geopolitical risks arising from the Russian invasion of Ukraine.
The Federal Reserve has made it clear that fighting inflation with higher interest rates is its primary goal. The Fed raised the rate on Fed Funds in March for the first increase since 2018 and the next increases are set to be announced at the upcoming 2022 meetings. The next Fed meeting announcement is scheduled for May 4, as investors gear up for higher rates and a shrinking of the Fed’s $9 trillion balance sheet. Two years ago, prior to the Covid-19 outbreak, the balance sheet total was $4 trillion. Most observers expect the Fed policies to be restrictive and openly aggressive in these attempts to bring inflation down. Fixed-income investors have already begun to ‘take their medicine’ and additional actions to raise rates are expected throughout the year. Accordingly, not much relief is anticipated in the near future and the returns on fixed-income investments will look decidedly negative for the full 2022 year.
Tom Burnett CFA is Director of Research