How do you explain historical bond market losses using the example of European government bonds?

The bond market is now more sensitive to interest rate changes than it was in 1994, in part because of the lower bond coupons issued in recent years.

If you feel that 2022 has been a particularly difficult year for the markets, that is because history proves you right. As you well know Oliver EichmannHead of Fees in the EMEA Bonds team at DWSThat difficult situation Commitments This year passes exceptionally well in the history of the modern economy.

to control inflationCentral banks were forced to raise interest rates many times. lead to higher prices The price fell of bond bonds. But even if we compare it to other moments in the past few decades when interest rates skyrocketed, the losses incurred by bond investors in 2022 are particularly evident.

The following chart illustrates Eichmann’s point well. Take for reference a European government bond indexwe note that bond yields had increased by 249 basis points by the end of October, lower than they were in the whole of 1994. European bond market It is now more sensitive to changes in interest rates than it was in 1994. Partly as a result of this Low coupon bonds released in recent years. Moreover, many issuers took advantage of the context of low interest rates in the 2000s to issue very long-term bonds.

Key: change in average duration

why him Duration Is it relevant? long-term commitments to Low coupons They are more sensitive to changes in interest rates than short- or long-term bonds. higher coupons🇧🇷 To put the numbers in context, raising interest rates by one basis point currently causes the rate to drop twice as much as it was in 1994, for example.

Moreover, this year – also unlike 1994 – he hardly offered bonds compensation In the form of voucher income, otherwise known as carry🇧🇷 Other elements, such as changes in the composition of the index over the course of the year, were only able to offset the historical losses in value incurred by bonds.

However, in Eichmann’s opinion, this is for the future Income increase It also offers advantages. a decade later Low or no returnsInterest rates and bond risk premiums are again sufficient, at least assuming that central banks will meet inflation targets over the medium term. The Tina Creedwhich states that there is no alternative (no alternative) to invest in risky assetsfinally ceased to be justified in 2022. “Compared to stocks, bonds are starting to become very competitive,” says the expert.