The Bloomberg Global Aggregate Index, a benchmark for the bond market worldwide, has tumbled 11% from its peak in January 2021, equating to a drop of $2.6 trillion in the index’s market value. Bloomberg News describes this as an unprecedented loss in the long history of the bond market. Big capital losses are always bad news in the stock market, but in the bond market can be welcome news for most.
One important reason is lower bond prices mean higher bond yields. Investors who hold bonds for income are pleased when their prices fall, because those bonds continue paying the same income as before. Plus, the new bonds they purchase as older ones mature pay higher income. Investors who hold bonds for capital appreciation need to look at their portfolio duration, which is 7.35 years for the Bloomberg Global Aggregate Index. What this means is that investors who care about total return are happy when bond prices decline if they expect to be in bonds for more than 7.35 years, because the additional yield their earn in the future more than offsets the immediate capital loss. On the flipside, they are unhappy if they expect to remove bonds from their portfolio sooner than 7.35 years.