The year 2021 began like so many others in the last decade: analysts promised losses for investors in fixed income, since the central banks would not be present in the market for much longer with their stimuli, which have brought so much joy to investors in debt in years of low inflation. It is the most repeated idea in recent years in the outlook reports for the next 12 months: “forget fixed income”, “reduce the weight of fixed income”, “fixed income bubble”… Doomsday headlines, logical, on the other hand, for those who consider it nonsense to lend money in exchange for negative interest. Who in their right mind would pay to leave money? But that’s how it has been, and all thanks to the central banks, which with their debt purchase programs have allowed this paradox to occur in the financial markets.
Year after year the warnings were repeated: “the fixed income bubble and negative returns could not last any longer”, but then the year ended with a positive balance for bond investors, or not as negative as many could hope, since that 2013, 2015 and 2018 were years of losses for bonds, but these were -2.6%, -2.1% and -1.2%, nothing similar to the debacle that many experts expected, and from which they warned.
However, it seems that the resistance of fixed income has ended and finally 2021 has been the year in which the forecasts that have been repeated so often have been confirmed. The debt has closed a year of heavy losses, so much so that it has been the worst exercise so far this century for the world’s largest bond index, the Bloomberg Barclays Global Aggregate, which includes titles of all types, countries and ratings. In 2021 the losses have been -4.94%, the worst record since the index was created in 1990, with the exception of 1999, when the decreases reached -5.17%, just before the start of the new millennium.
Sovereign bonds have been the ones that have dragged the index towards . These types of bonds, those of governments, are the ones that have had the worst behavior within the entire spectrum of fixed income, with falls of -6.76% in the year, in their case closing 2021 as the worst year of their history, above the -6.66% with which they ended 1999, their worst year to date.
Now, the US bond with a maturity of 10 years closes the year with a yield of 1.52%, and started it at 0.91%. In this case, the price losses have been -5.5%. As for the German, it began the year with a -0.572% return and ends it at around -0.18%, leaving losses of -3.70% for investors. For its part, the Spanish started the year with a 0.04% return and closed it at 0.562%, with a price drop of -4.83% since the start of the year.
For the corporate bond index, losses have reached -1.57%. The riskiest debt, the one that does not have an investment grade, also known as junk or high yield bonds, is the one that has held up the best in the year, leaving a return of 0.92% for investors.
Among the most attractive bonds for investors, we must highlight the Chinese fixed income in renminbis. Many managers have pointed out in recent months the attractiveness of this type of bond, at a time when the search for yield was almost an impossible mission in the fixed income market. With them, almost 14% is earned in the year, but do not be fooled, since a good part of this profitability has been achieved thanks to the revaluation of the Chinese currency, which has risen 10.6% in 2021 against the euro. .
Hello inflation, goodbye stimulus
As already mentioned, the resilience of fixed income in recent years has been directly related to central banks. Since there was no trace of inflation, and their job is to keep it at 2%, both the US Federal Reserve (Fed) and the European Central Bank (ECB) proposed to reactivate it based on massive injections of liquidity in the system. To do this, they decided that the best way was to buy bonds, both government and corporate, and that this financing ended up being channeled to the real economy. The result was a bond market in which there were billions of euros in negative-yielding securities, even bonds with the worst ratings for rating agencies.
The arrival of the Covid-19 pandemic that the big central banks had planned, but it was only that, a delay. In 2021 there has been a significant change in the inflation dynamics compared to recent years, and this has been the trigger for the losses in fixed income. Prices have begun to grow at a rate that has taken analysts, managers and also, of course, central bankers by surprise.
Inflation began to rise with particular force since the summer and rates have reached 6.8% in the United States and , maximums not seen since 1982 and 1992, respectively. The central banks have not reacted immediately, since they have wanted to ensure that this rebound was not temporary, an increase derived from the bottlenecks that have been generated after the pandemic, with the demand for many goods and services skyrocketing at around levels that the offer has not been able to satisfy, and an imbalance between the supply and demand of energy that continues to be transferred, due to its impact on the margins of industrial companies, to the rise in prices of other goods.
An error in monetary policy, such as that of Trichet at the head of the ECB in 2011, is what central banks have wanted to avoid and, according to many experts, it is one of the important risks facing markets in 2022. If the Fed rushes with the rate hikes it has in mind (according to the perspectives of the members of the entity themselves), it could ruin the economic recovery after the pandemic.
For its part, no rate increases are expected for the ECB, not even until the end of 2023, but the institution chaired by Christine Lagarde has already announced, at the last meeting of this year, in December, the rate at which it will go reducing debt purchases next year. The ECB’s position is not at all aggressive, and they continue to rule out rate hikes as they insist that inflation will be corrected in 2022 and will be below its 2% target, both in 2023 and 2024, so it will continue needing the support of his stimulus policies. Many managers and experts agree with this ECB analysis, but there are others who believe that low rates and not ending debt purchases as soon as possible will be the trigger for runaway inflation.
Whatever happens, the truth is that the market has already begun to assume that the process of dismantling central bank stimulus has already begun, and that has led investors to exit fixed income in 2021, a year which will be remembered very negatively for this type of asset.
The funds, by category
Fixed income fund managers, in general, have managed to avoid the debacle that has occurred in this type of debt in the last 12 months. The global fixed income category collected by Morningstar, which includes funds that invest in all types of bonds, leaves a return of 1.14% on average in the year. In this way, it seems that active management has worked in this case, taking as a reference the funds in euros available for sale in Spain. The best fund in this category was Dodge & Cox Worldwide Global Bd EUR Acc, with a 6.73% return over the year.
With sovereign fixed-income funds, an average loss of -3.18% has been lost, with the product that has held up best in the year being the LO Funds Euro Government Fdmtl EUR SA, with a return of 2.13%. Regarding corporate fixed income, the average drop in the products has been -0.94% in the year, with the AXA WF Euro Credit Plus I Cap EUR Redex being the one that has left the best result: 3.10 %.
As for emerging fixed-income funds, an average of 3.18% was achieved with these products in 2021, with the most profitable vehicle of the year being the MS INVF Emerging Markets Debt S, with a 16.7% return on the exercise. On the part of the funds that invest in inflation-linked bonds, securities that perform better when there are periods of price increases, as has been the case this year, it is the category that has done best in 2021, among the six that we have highlighted. With them, on average, 5.11% has been achieved in the year, with iShares Eur Gov Inf Lkd BdIdx(IE)Flex Acc being the most profitable fund in its category, with a 6.97% return in the year .
Finally, with non-investment grade fixed income funds, the high yield, the returns that have been achieved on average are 2.54%. It leads the classification of this type of vehicle due to the profitability that Capital Four Invest Credit Opp fund B has left its participants, a product that leaves a profitability of 11.87% since the first day of the year.
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