Bonds have been depreciating the most in years

Rising inflation and interest rate increases by FED triggered an unprecedented sell-off this year US bond market. The price of 30-year US bonds fell 14 percent. Polish bonds are also cheaper - 4,9% since the beginning of the year.

About the author

Pawel Majtkowski - analyst eToro on the Polish market, which shares its weekly commentary on the latest stock market information. Paweł is a recognized expert on financial markets with extensive experience as an analyst in financial institutions. He is also one of the most cited experts in the field of economy and financial markets in Poland. He graduated from law studies at the University of Warsaw. He is also the author of many publications in the field of investing, personal finance and economy.

Bonds depreciate sharply

The world's largest US bond market has been experiencing serious declines since the beginning of the year. The price of the 30-year US bond fell by 14%, twice the fall in global stocks (a higher risk instrument). Traditionally the safest short-term US Treasury bills bring losses. This is the worst start to the year for US bonds in over 30 years. In an environment of high inflation, which is likely to persist for a long time, investors now prefer commodities, real estate, value and dividend companies rather than bonds. It is also an effect of concerns about the emergence of stagflation, i.e. a period of high inflation and low economic growth, which is best helped by such assets to survive.

In Poland, we are also seeing a decline in bond prices, although not as high as in the US. Since the beginning of the year TBSP Index - the official (income - including interest) index of Polish treasury bonds fell by almost 4,9 percent, and over the last year by 13,5 percent. Along with bonds, Polish bond funds also get cheaper. For comparison, the WIG20 index has lost 6,4 percent since the beginning of the year, but gained 12 percent in the last 10,3 months.

The yield on US bonds is also an indicator of the risk of a recession. This is important to stock market investors, as money is usually earned outside of recessionary periods that bring significant losses. Each of the last 10 recessionary periods in the US lasted an average of 11 months and resulted in a 30% loss of capital. The best predictor of a recession is the negative difference between the yields of 10-year and 3-month US bonds. Currently, the interest rate on 10-year bonds in the US is 2,29%, and on 3-month bonds 0,44%. This means that the difference is positive and is safe, from the point of view of recession risk, 1,85 pp. It therefore seems that the foundations of the US economy are weakened by high inflation, but safe. However, it is also worth looking at the difference between the yield on 10- and 2-year bonds, which is only 0,20 pp and is much closer to a drop below zero. And that can be a source of additional market volatility.

ETF based on the debt market

People looking for exposure to instruments that ensure a steady income, currently have many options in the market depending on their investment perspective and risk profile. In such a situation, the first choice may be cheap and widely available ETFs. For example, funds Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) and/ or iShares Short Treasury Bond (SHV) offer exposure to low risk fixed income instruments. They focus on short-term instruments with the lowest exposure to long-term inflation. By contrast, those who believe US inflation will continue to rise may consider inflation-proof ETFs such as iShares TIPS Bond ETF (TIP) and/ or Vanguard Short-Term Inflation-Protected Securities (VTIP). Alternatively, if someone believes in an imminent decline in inflation, they may consider investing in ETFs based on long-term bonds that are more prone to inflationary risk, such as iShares 7-10 Year Treasury Bond ETF (IEF) or even iShares 20+ Year Treasury Bond ETF (TLT).