The Bond Market Losing $2.6 Trillion Is Actually Good News

The Bloomberg Global Aggregate Index, a benchmark for the bond market worldwide, has tumbled 11% from its peak in January 2021, equating to a drop of $2.6 trillion in the index’s market value. Bloomberg News describes this as an unprecedented loss in the long history of the bond market. Big capital losses are always bad news in the stock market, but in the bond market can be welcome news for most.

One important reason is lower bond prices mean higher bond yields. Investors who hold bonds for income are pleased when their prices fall, because those bonds continue paying the same income as before. Plus, the new bonds they purchase as older ones mature pay higher income. Investors who hold bonds for capital appreciation need to look at their portfolio duration, which is 7.35 years for the Bloomberg Global Aggregate Index. What this means is that investors who care about total return are happy when bond prices decline if they expect to be in bonds for more than 7.35 years, because the additional yield their earn in the future more than offsets the immediate capital loss. On the flipside, they are unhappy if they expect to remove bonds from their portfolio sooner than 7.35 years.

The vast majority of bond investors are either income investors or expect to be in bonds indefinitely. The exceptions are those using bonds as a moderate-risk investment saving for medium-term expenses, such as college or a down payment on a house, and market timers who get in and out of bonds for short-term capital gains. I have no idea how much the latter group represents of the $2.6 trillion, but I’ll throw out $100 billion as a guess as good as any other. If so, the other $2.5 trillion represents investors happy about the loss. And if you weren’t in bonds up to now, but are scared due to the losses, you’re thinking backwards. You can enjoy all the benefits of higher yields without having to suffer the capital loss borne by existing bond investors.