(Corrects paragraph three to deal with complete returns; earlier model cited knowledge displaying three years of falling web asset worth of funds, updates first chart to indicate complete returns of funds)

By Harry Robertson

LONDON (Reuters) -Lots of the world’s largest bond funds are dealing with their third straight yr of losses for the primary time in roughly 40 years, as a relentless U.S. economic system sends bond yields to their highest ranges in additional than a decade.

But removed from being delay, buyers are loading up on bonds once more in 2023 after bailing out of the market final yr, drawn in by the identical run-up in yields that has prompted a lot ache.

U.S. diversified bond funds – which put money into public and company debt – are on monitor for a 3rd yr of adverse returns, after dropping greater than 10% in 2022, Morningstar knowledge reveals.

European funds have successfully returned nothing this yr after two down years. Authorities bond funds have fared even worse and are set to fall for a 3rd yr in each the U.S. and Europe, in keeping with figures from Morningstar and knowledge supplier EPFR.

“The repricing has been fairly aggressive – I’d say brutal,” stated Stefano Fiorini, world mounted revenue fund supervisor at Generali (BIT:) Investments Companions.

The primary driver within the years-long sell-off has been central banks’ fast rate of interest hikes to tame inflation.

Extra just lately, the offender has been a U.S. economic system that has ploughed forward regardless of the Federal Reserve pushing borrowing prices to their highest degree in 22 years. Worries about excessive authorities debt and central banks stepping out of bond markets have additionally performed an element.

The yield on the 10-year U.S. Treasury notice is on monitor for its third consecutive annual enhance for the primary time because the financial chaos of the early 1980s, in keeping with Refinitiv knowledge. It climbed above 5% final week to its highest since 2007. Bond yields rise as costs fall, and vice versa.

A Citi index which tracks how robust U.S. financial knowledge has been relative to analysts’ forecasts reveals that it’s defying all expectations. Many buyers assume which means the Fed will not want to chop rates of interest any time quickly.

“The re-rating within the forecasts has simply been unbelievable within the U.S.,” stated Oliver Blackbourn, a multi-asset portfolio supervisor at Janus Henderson. “(It) has caught everybody out.”

The comfort for bond fund managers is that yields at the moment are much more enticing to buyers than three years in the past, after they have been near zero. Now, curiosity revenue can maintain bond fund returns constructive even when costs fall additional.

On the ICE BofA US Treasury index, for instance, a measure known as the yield-to-duration ratio reveals that yields must rise roughly 0.85 share factors from right here to trigger value falls sufficiently big to cancel out a yr’s value of curiosity funds, which at present stand at about 5%.

And plenty of buyers nonetheless assume the U.S. economic system will sluggish sooner or later and that the Fed will duly minimize charges, boosting bonds.

“You’ve got received a little bit of a buffer, lastly,” stated Jonas Goltermann, markets economist at consultancy Capital Economics. “Ultimately this commerce goes to be proper, however do you dare to become involved once more?”

Roughly $160 billion has flowed into U.S. bond funds this yr, in keeping with the Funding Firm Institute, after buyers pulled round $225 billion final yr.

Financial institution of America stated there have been $5.6 billion of inflows to long-dated Treasury funds final week, the most important on document.

Buyers are usually choosing passive exchange-traded funds, that are cheaper and simpler to commerce, though many huge energetic funds are nonetheless seeing money return.

But loads of buyers stay cautious of bonds and like to camp out in money-market funds, cash-like investments that at present supply excessive charges of return and fewer threat.

ICI knowledge reveals that U.S. cash market funds have ballooned to $5.6 trillion in belongings, from $4.6 trillion in October final yr.

“The argument is: I simply wish to maintain a set revenue instrument as a result of the carry is way larger,” stated Max Kettner, chief multi-asset strategist at HSBC. “That is high-quality, however then you definately sit within the highest yielding instrument, which is money.”

(Reporting and graphics by Harry Robertson; Enhancing by Mark Potter)