The first quarter of 2022 was one of the worst in years for bond fund investors, according to an article in Barron’s. The global markets and supply chain were rocked by Russia’s invasion of Ukraine, fueling volatility around the world. Emerging markets continued to decline, as losses from Chinese stocks that are on the brink of being delisted from U.S. exchanges mount: the iShares MSCI Emerging Markets ETF was down 7.6% through the end of March. Meanwhile, in the U.S., stocks continued to tumble, but large companies and value stocks were holding up better than growth, with the iShares Russell 1000 Value ETF down 1.2% compared to the iShares Russell 2000 Growth ETF, down almost 13%.
Amidst the slump, bond funds did not offer a safe haven for investors, as the Fed raised rates for the first time in 3 years by a quarter-point. Investors have responded by factoring in a faster and higher pace of rate hikes in order to combat inflation, causing yields market-wide to rise swifter than they have in years while prices fall. As a result, investors have yanked $87 billion from bond mutual funds and ETFs in this year’s first quarter—the biggest outflow since the same period of 2020, the article reports.
There wasn’t a corner of the bond market left untouched by the losses, from Treasury bonds to corporate bonds, though bonds with shorter maturities fared better. Since investors expect interest rates to go up, they’re pinning their hopes on short-term bonds which could potentially garner higher yields in the future. Another strategy for protecting a portfolio from rising rates and inflation is to buy Treasury inflation-protected securities (TIPS); “the ProShares Inflation Expectations ETF, which tracks the difference in yield between Treasury bonds and TIPS, gained 4.6%,” the article noted.
Meanwhile, the iShares inflation Hedged Corporate Bond ETF, which uses swap contracts to shift its inflation risk to another party in exchange for a fixed cash payment, only fell 5.1% through the end of March. And some ETFs are utilizing a short position in Treasuries to get to zero duration risk, such as the Wisdom Tree Interest Rate Hedged U.S. Aggregate Bond ETF, down only 0.5% in the first quarter.
Senior loans, which offer higher yields as well as floating rates, also did a bit better, but the only real bright spot in the first quarter was commodity funds, which have soared as a result of the war in Ukraine. With the supply chain disrupted, transportation of Ukrainian wheat blocked, and sanctions and export bans enacted against Russia, commodities prices have skyrocketed: the biggest index-tracking commodity ETF, the Invesco Optimum Yield Diversified Commodity Strategy No. K-1 ETF, shot up 25% in the first quarter, the article concludes.