By Dhara Ranasinghe, Yoruk Bahceli and Stefano Rebaudo
LONDON – It’s been an extraordinary year for bonds after long-dormant inflation jumped and central banks began unwinding unprecedented stimulus sparked by COVID-19.
The European Union became a major borrower and sold debt worth 140 billion euros, Britain and Italy joined the fast-growing green bond market and junk debt had a stellar year.
Here’s a look at some of 2021’s eye-popping moves.
Ten-year Treasury yields are up around 50 basis points, set for their biggest annual rise in absolute terms since 2013.
U.S. bond returns are down 3%, making Treasuries one of 2021’s worst-performing major bond markets.
At 1.42%, 10-year yields appear at relatively modest levels given inflation has reached almost four-decade highs near 7%.
But with the Federal Reserve accelerating likely policy tightening in 2022, yields are forecast to push above 2% next year.
(Graphic: US 10-year Treasury yields set for biggest annual fall since 2013, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnlebkpq/UST2012.png)
Italy’s bond yields are poised to end 2021 with their second biggest annual rise since the 2011 euro debt crisis, as the European Central Bank dials back its bond-buying stimulus.
Ten-year borrowing costs are up around 40 bps this year to 0.95%, not quite as stark as the 78 bps jump in 2018 when markets worried about Italy’s commitment to the euro.
Germany’s 10-year Bund yield is up just 20 bps this year, highlighting a divergence between euro area and U.S. monetary policy as well as Omicron-triggered uncertainty.
(Graphic: Negative returns for most major bond markets in 2021, https://fingfx.thomsonreuters.com/gfx/mkt/myvmnalbapr/returnsdec21.PNG)
Australia’s central bank in November abandoned an ultra-low target for bond yields in a policy known as yield curve control, a step towards unwinding pandemic-era stimulus.
Expectations for tighter policy have pushed up three-year bond yields 82 bps this year to 0.92%, which would mark the biggest annual rise in 12 years.
In Britain, where the Bank of England this month delivered a surprise rate hike, two-year bond yields have seen the biggest annual jump since 2006.
(Graphic: Britain’s two-year bond yield, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoxbqkpx/GB2012.png)
The European Union completed its transformation into a major borrower after it began issuing bonds to finance a post-pandemic recovery fund, worth up to 800 billion euros ($902 billion).
The EU has raised 91 billion euros in bonds and bills for the fund this year, after raising another 50 billion euros for the SURE unemployment scheme it started funding last year.
It also sold the world’s largest green bond, raising 12 billion euros from record demand.
Green bond issuance is set for yet another record year, roughly doubling from last year to nearly $500 billion, according to Refinitiv data.
Britain, Italy, Spain and the EU issued green bonds for the first time.
Increased green bond issuance has eased scarcity, shrinking the “greenium” investors have to pay to get hold of corporate green bonds.
Issuance of sustainability-linked bonds, linked to company-wide goals rather than specific projects, surged 11-fold to $91 billion, according to Refinitiv.
(Graphic: European ESG bond issuance share, https://fingfx.thomsonreuters.com/gfx/mkt/zgvomnddqvd/afme%20chart.png)
With inflation surging, investors have piled into inflation-linked bonds for protection.
Such bonds were the second best performer in fixed income markets this year, according to BofA indexes.
Key market gauges of longer-term inflation expectations have also jumped, including in the euro area and in Britain.
(Graphic: Inflation forwards rise as price pressures surge, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkoxlnvq/inflation2021.png)
The lowest-rated junk bonds, at Triple C and below, are set to return nearly 10% in both the U.S. and the euro markets, BofA indexes show, as investors snapped up assets offering any real return while inflation runs hot.
Attractive funding costs pushed junk companies to issue $646 billion of bonds, according to Refinitiv, a second record year running, even as investment-grade issuance declined.
In contrast was Asia, where property firm Evergrande’s woes battered Chinese high-yield bonds. The dollar-denominated market is headed for a 30% loss this year, according to BofA.
(Graphic: Evergrande woes crush China HY, https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrzmmkpm/china%20hy%20returns.png)