U-Turn on Fed Rate Cut Bets Wipes Out Last Year’s Bond Gains

Investors wagering on an extension of last year’s global bond gains have been served a harsh reality check.

Expectations of higher-for-longer US interest rates, bolstered by a hot inflation print this week, have helped wipe out the 4.2% return on global sovereign debt from 2023. Bond investors eked out a gain last year after 24 months of losses amid bets on a Federal Reserve policy pivot, but bearishness is returning with full force as data continues to highlight the resilience of the US economy.

“The risk here is that the losses can extend,” said Gareth Berry, a strategist at Macquarie Group Ltd. in Singapore. “A key danger is that excessive mark-to-market losses can lead to forced selling in bond markets.”

Bond Gains Erased on Higher US Rate Jitters

A Bloomberg gauge for government debt has declined 4.7% since January, driven largely by investors now expecting under two Fed interest rate cuts this year — a significant backtrack from earlier bets of more than 150 basis points of easing starting March. Bonds have also come under pressure after the Bank of Japan raised its interest rate for the first time in 17 years, strengthening convictions of higher yields after the last anchor of negative rates lifted off.