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All the worst things about the 1970s seem to be coming back. Inflation. Strikes. Really silly flared trousers. And of course double-digit bond portfolio drawdowns.
This chart from JPMorgan Asset Management’s 2024 Long-Term Capital Market Assumptions document caught our eye by showing quite how dire government bonds have been in the context of the last five decades:
Wowser!
Alphaville knew bonds had been having a rough time, but have drawdowns really been bigger than the 1970s, when government yields spiked to near 20 per cent?
Drawdowns basically describe the biggest loss you could have suffered if you were unlucky enough to have bought an asset at exactly the worst time. This is actually helpful, as there are always reasons in financial markets to feel like *today* could be the top.
It looks like JPMAM take drawdowns from a BofA bond index, which is fair enough. Indices will have compositional drift issues though, so we had a go at recreating the analysis using constant-maturity key-rate benchmark yields and some Excel wizardry.
The chart is interactive: you can select individual series, or all the nominal or real terms drawdown lines.
On a tenor-by-tenor basis, our current bond bear market doesn’t look deeper than the 1970s in real terms for any individual tenor. We suspect the difference probably reflects a lengthening of the average maturity of US Treasuries in the BofA index, though without a specified index and a bit more work it’s hard to say.
How do things look for holders of other developed government bonds versus the grand sweep of history? We pulled together return series for constant 10-year government bonds of the US, UK, Germany and Japan to find out.
In nominal terms things have never looked worse, and yes — the 1970s looks a cake walk compared to our post-Covid times.
The 1970s was a ‘special’ time for the UK bond market (and economy more generally). But despite soaring yields and inflation in Japan, Germany, and the US, nominal bond market returns were a bit ‘meh’.
Sure, Paul Volcker arrived on the scene in 1979, but a 15 per cent nominal drawdown on 10yr USTs is hardly end of days stuff. And it was all over sharpish. But if you were holding Bunds or JGBs you’d be pressed to know what the fuss was all about.
However, in real inflation-adjusted terms we cannot quite so ready consign the 1970s to the status of an also-ran bond bear market (although Bund-holders have not seen such real-terms losses for over 50 years, and real-term losses are getting close to 1970s magnitude for both Gilt and Treasury holders.
It’s worth marvelling for a moment quite how disastrous the 1970s were for both British and American government bondholders in real terms, and also admiring at how they each suffered their fates in such a non-synchronised manner.
Today’s global bond bear market stands out not only for its magnitude and pace, but also for the synchronicity with which it is affecting holders of government bonds in different markets.
But while it’s entirely possible that this bond bear market will ultimately prove worse, the drawdowns in the US and UK markets of the 1970s stand out for their sheer duration. It took a decade for holders of ten-year gilts, and fourteen years for holders of 10-year US Treasuries to recover the real purchasing power they each had in 1972.
So while this bear market has been a shocker, we reckon we’ll need to check back in 2034 to see whether it beats the 1970s for sheer doggedness.
