Bonds Outperform Stocks in Best Start to a Year Since 2008

Bonds beat stocks last month for the first time since August as fixed-income securities worldwide enjoyed their best start to a year since 2008.

The start of the year in financial markets went as almost no one expected, with fixed-income assets worldwide posting their biggest January returns since 2008 and equity prices falling the most since 2010. Gold, given up for dead in 2013 as prices tumbled 28 percent, rallied.

“There’s no question that it has taken people by surprise,” Neil Azous, a founder of Stamford, Connecticut-based research firm Rareview Macro LLC,, which advises investors including hedge funds and money managers, said in a Jan. 29 phone interview. “It’s painful.”

With the U.S. Federal Reserve pledging to buy fewer bonds and the global economy gathering steam, the safe bet going into 2014 was to avoid debt markets in favor of equities. What few saw coming was the turmoil in emerging markets from China to Argentina that followed a slowdown in U.S. jobs growth, upending even the best laid strategies of investors.

The Bank of America Merrill Lynch Global Broad Market Index returned 1.6 percent in January as of Jan. 31, including reinvested interest, while the MSCI All-Country World Index of stocks lost 4.1 percent. The Standard & Poor’s GSCI Total Return Index of metals, fuels and farm products declined 1.6 percent even as gold jumped 3.2 percent, recovering from its biggest annual loss in 32 years. The Bloomberg Dollar Spot Index rose 1.2 percent.

Shock Sequence

The first shock came Jan. 10, when the U.S. Labor Department said payrolls rose by 74,000 in December, below the 197,000 median forecast of 90 economists surveyed by Bloomberg.

Almost two weeks later, a report from HSBC Holdings Plc and Markit Economics Ltd. said Chinese manufacturing may contract for the first time in six months. That added to concern growth in the Asian nation, which buys everything from Chile’s copper to South Korea’s cars, is losing momentum just as a high-yield trust in China threatened to default. HSBC and Markit confirmed this week that manufacturing in the nation shrank in January.

Then, Argentina’s peso started sliding as the central bank pared dollar sales to preserve international reserves that have fallen to a seven-year low. The central banks of India, Turkey and South Africa all raised interest rates to defend their currencies as they tumbled.

‘Knife’s Edge’

All of that followed the Fed’s Dec. 18 decision to cut its purchases of Treasuries and mortgage securities to $75 billion a month from $85 billion, which did more to temper the appeal of high-risk assets than reduce demand for bonds. Policy makers said Jan. 29 they will taper purchases to $65 billion.

“This is an unusual January,” Joseph Quinlan, chief market strategist at U.S. Trust Bank of America Private Wealth Management, which invests more than $300 billion, said in a phone interview from New York. “We’re right on the knife’s edge where we’re coming off Fed tapering -- a huge shift in monetary policy. Emerging markets have been suspect all along and there’s weakness in those markets. It’s all coming to a head.”

Benchmark U.S. 10-year Treasury yields fell to 2.64 percent from 3.03 percent at the end of December, defying economists who predicted a rise to 3.4 percent by year-end, based on a Bloomberg survey of banks.

Equity Bulls

Some 62 percent of equity newsletter writers surveyed by Investors Intelligence were bullish at the start of January, the most in six years. The year-end forecast for the S&P 500 Index (SPX) was 1,955, implying a 5.8 percent increase from Dec. 31, according to 20 equity strategists surveyed by Bloomberg.

The rally in bonds worldwide followed last year’s 0.31 percent loss, the first since 1999, according to the Bank of America Merrill Lynch Global Broad Market Index.

The gauge, which tracks more than 21,200 securities with a market value exceeding $45 trillion, shows yields are about 1.9 percent on average, down from almost 2.10 percent at the end of December and last year’s high of 2.27 percent in September.

Gains were led by corporate debt, which returned 1.4 percent on average, including 0.5 percent for speculative-grade securities. Sovereign bonds added 1.5 percent, including 1.6 percent for U.S. Treasuries.

Portugal’s bonds soared, gaining 6.6 percent, based on indexes by Bloomberg and the European Federation of Financial Analysts Societies. Spain followed, returning 2.8 percent. South Africa was the biggest loser, falling 2.8 percent.

Currency Gyrations

Euro-area bonds extended their gains yesterday as a report showed inflation in the region slowed in January, boosting speculation the European Central Bank will need to take more measures to stimulate the economy. Spanish and Italian rates touched record lows and Germany’s 30-year yields fell to the least since August.

In a month dominated by gyrations in emerging-market currencies, the Bloomberg Dollar Spot Index jumped to 1,031.57, its highest monthly closing level since August.

The greenback benefited along with the yen from investors seeking a haven. Japan’s currency jumped 5.5 percent as measured by Bloomberg Correlation-Weighted Indexes, its biggest monthly gain since appreciating 8.5 percent in May 2012.

A Bloomberg customized gauge tracking 20 developing-nation currencies fell 3.1 percent. Argentina’s peso tumbled 19 percent, while South Africa’s rand plunged 5.7 percent and Russia’s ruble dropped 6.5 percent.

Investor Confusion

“We know what the Fed is going to do, but we don’t know what the ultimate consequences are,” Robbert Van Batenburg, director of market strategy at Newedge Group in New York, said by phone. “We don’t know what’s going on in China with respect to the shadow banking system.”

Argentina’s central bank increased interest rates to the highest in more than a decade on Jan. 28 in an attempt to draw investors to peso assets, following the move to devalue the currency earlier in the month.

Turkey’s central bank raised all its main interest rates at an emergency meeting Jan. 29, including an increase in the one-week repo rate to 10 percent from 4.5 percent. India and South Africa unexpectedly raised rates, after Brazil boosted its benchmark earlier in the month.

The 4.1 percent drop in the MSCI All-Country World Index of equities is the biggest in almost two years, and follows a 24 percent surge in 2013, after accounting for reinvested dividends. About $1.8 trillion was lost from worldwide share values in January.

‘Serious Correction?’

“Investors are debating it’s just a minor hiccup in this incredible five-year bull rally, or is the party over and we’re really doing to see a serious correction?” Uri Landesman, the president of New York-based hedge fund Platinum Partners, which has about $1.3 billion of assets, said in a phone interview.

The S&P 500 Index slumped 3.5 percent in January, including dividends. The move followed the biggest annual rally in 16 years in 2013, when the measure returned 32 percent.

Japan’s Topix Index (TPX) fell 6.3 percent, the biggest decline since 2012. The Stoxx Europe 600 Index slipped 1.6 percent, while the MSCI Emerging Markets Index lost 6.6 percent.

January’s increase in gold ran counter to the drop in the S&P GSCI Total Return Index, which posted its worst annual start since 2010. The 1.6 percent loss builds upon 2013’s decline of 1.2 percent.

“There is no single theme that runs across commodities in general,” Jason Lejonvarn, a strategist in London at Hermes Fund Managers Ltd., which oversees $1.6 billion in commodities, said in a phone interview Jan. 28. “Quite a bit of sugar supply is coming on stream. Natural gas is a very strong weather play.”

Wheat, Sugar

Wheat led losers, falling 8.2 percent last month to $5.56 a bushel in Chicago, after declining to the lowest since 2010. Stockpiles at the end of May will be 185.4 million tons, up from 182.78 million tons estimated in December, the U.S. Department of Agriculture said.

Raw sugar slipped 5.2 percent to 15.55 cents a pound in New York amid forecasts by the International Sugar Organization that global supply will outpace demand for a fourth year.

Natural gas futures topped the winners, rallying 17 percent as cold weather in the U.S. stoked demand for the heating fuel. West Texas Intermediate oil declined 0.9 percent to $97.49 a barrel. It will average $95 a barrel in the fourth quarter, according to a survey of analysts. Energy makes up about 70 percent of the S&P GSCI weighting.

Gold is vulnerable and prices may fall to $1,050 an ounce by year-end as the Fed curtails the amount of money it pumps into the U.S. economy, according analysts led by Jeff Currie at New York-based Goldman Sachs Group Inc. The forecast represents is a 15 percent decline from the current level.

The metal rallied for 12 years, with gains accelerating from 2008 on bets that measures by the world’s central banks to stimulate growth after the global recession would devalue currencies and accelerate inflation.

January “was definitely a surprise for investors,” said Paresh Upadhyaya, Boston-based director of currency strategy at Pioneer Investment Management Inc., which oversees $236 billion.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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