The global real yield tantrum of 2022 is here

Central bankers are no longer patient when it comes to inflation. Federal Reserve Chair Jerome Powell made that clear at last week’s meeting when he basically confirmed a March interest-rate hike. European Central Bank President Christine Lagarde refused to repeat previously-made comments that a rate hike this year was “very unlikely,” and instead indicated there was “general concern” among policymakers about inflation and that she’d be open to raising rates this year. Then, of course, there was the Bank of England, where policymakers seriously considered raising rates by 50 basis points in the latest meeting.
The market response has been swift, but not catastrophic. The global pool of negative yielding debt plunged by 20% in one day, to the lowest amount since October 2018. Yields on Italian government bonds surged to the highest since May 2020 and German 5-year notes turned positive for the first time since 2018.
Even with all of these superlatives, markets haven’t really begun to comprehend what the synced up tightening of developed-market central banks will ultimately will mean. It’s one thing for the Fed to return to a more normal rate. It’s another for the ECB to end its negative-rate policy — as soon as later this year — for the first time since 2016. Add these two together, along with a highly uncertain economic trajectory and the biggest inflationary impulse in decades, and we’re in profoundly unknown territory.
This dynamic is bound to create some big ripples. Investors have spent years losing money by owning developed-market bonds that pay nothing. What do they do when they start actually making a real return? How do they value riskier bonds that were priced as though yields would remain at record lows forever?
For years, strategists argued that US bonds would remain bid by the rest of the world, since yields elsewhere were so low. What happens when that starts to change, and the weight of negative-yielding securities is lifted?
Credit markets have remained relatively calm throughout much of this year’s equity turmoil, but started to show some cracks this week. Debt funds had their largest weekly outflow since March 2021, with $11.6 billion exiting bond funds in the week to Febuary 2, with high yield and investment grade debt seeing their ninth-largest weekly outflows since 2003, Bank of America Corp. and EPFR Global data show.
This week we got a glimpse of what was once commonplace: a developed-market world where investors could actually earn money from bonds, even on an inflation-adjusted basis. But it will come as a bigger shock as the realisation sinks in. The safety net is gone.

—Bloomberg