The bond bear market will not spare anyone The bond bear market will not spare anyone The bond bear market will not spare anyone

The bond bear market will not spare anyone

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  The energy crunch will have serious consequences on the bond market because it will keep price pressures sustained, eroding the convenience of holding fixed income instruments that offer moderate spreads over their benchmark. High inflation translates into more aggressive monetary policies worldwide, even for central banks - such as the European Central Bank -that have notoriously been more dovish than others. Therefore, it is inevitable that investors will avoid facing the risk of higher rates this year and this will increase market volatility. Yet, in light of solid economic growth, lower-rated credits might prove not to be as vulnerable as high-grade bonds. Indeed, junk carries less duration than the latter, making it more resilient to interest rate hikes. In 2022, investors need to prepare for the pains of a bear bond market, looking to navigate rough waters while keeping an eye on future opportunities.

Euro area: Credit spreads will remain supported while rates rise

The ECB is finding itself between two fires: higher inflation and stalling growth. As long as policymakers believe that inflation is not a credible threat, the central bank will keep its monetary policy highly expansionary. However, if inflation does become a likely menace, the ECB will be forced to engage in more restrictive monetary policies. Under the symmetrical inflation framework adopted last summer, inflation needs to average around 2 percent. If it remains persistently above this level, the ECB will be forced by its statute to intervene. Therefore, the central bank’s inflation forecasts for 2023 and 2024 will be in the spotlight throughout the year. Investors will be looking at the energy crisis, supply-chain bottlenecks, and labour wages and supply, which can all contribute to stickier price pressures. In addition, services inflation could increase as Covid restrictions ease, adding further upside pressure to inflation risk despite economists expecting goods inflation to moderate next year.

Policymakers’ positions concerning inflation risk will get more transparent throughout the year. Meanwhile, we can say that monetary policies remain supportive for European credit spreads following December’s ECB meeting. During the latest monetary policy meeting, the central bank confirmed the end of the PEPP program in March while establishing that reinvestments will continue until at least the end of 2024. PEPP “flexibility” was extended to PEPP reinvestments only and not to the APP, as the market had initially expected, although the APP program will be used to transition to the new regime. It will be increased from €20bn per month to €40bn during the second quarter of the year. It will be then reduced to €30bn in the third quarter to return to €20bn by the end of the year. Any change to the mentioned assets purchase plan due to rising inflation could threaten credit spreads.

Things are different for European government bonds, with QE halving this year if the Covid pandemic doesn't worsen. European sovereigns will lose a significant part of the support provided by the ECB in 2020 and 2021, provoking yield curves to steepen. This trend will be particularly true for German Bunds, which we expect to break above 0 percent during the first quarter of the year and rise towards 0.3 percent by the end of 2022. The expansionary fiscal policies of the new German government, thus more Bund issuance, will support the uptrend in long-term Bund yields. However, if the ECB leans towards rate hikes in 2023, the Bund curve would bear-flatten while provoking a widening of the BTP/Bund spread. Ultimately, a big part of the Bund’s performance will come down to how much US Treasury yields rise, given that the correlation between the two is close to 1.

Source: Bloomberg and Saxo Group.

Fixed-income investors should pay attention to the periphery, particularly the BTPS/Bund spread

The recently imposed restrictions amid another Covid wave will take a toll on Italy's high growth rates. Additionally, the departure of Mattarella as president of the republic opens up the possibility of another political crisis, which could culminate into a new election if Mario Draghi decides to move to il Quirinale. Therefore, it is safe to assume the BTPS/Bund spread will widen throughout the year, with a significant part of the rise during the first quarter of the year as political uncertainty remains high. In the most bullish scenario, which sees Draghi continue to lead the government as prime minister, the BTP/Bund spread could rise to 160bps. However, suppose the former president of the ECB decides to leave his current role to pursue the presidency; in that case, the BTP/Bund spread is likely to rise to 200bps. It could even briefly break above this level if it comes down to new elections.

However, we remain constructive on the BTP/Bund spread in the long term. Indeed, we do not see the ECB being as aggressive as the Federal Reserve at any point soon, offering some support for European sovereigns. Additionally, spread compression across the euro area is likely to resume as inflation fears lessen. Indeed, the new German government is committed to creating a better integrated Europe. At the same time, the ECB pledges to provide stability to European markets. Therefore, despite the bumpy road ahead for BTPS this year, they remain a compelling investment for real money such as pension funds and insurances.

Source: Bloomberg and Saxo Group.

Higher yield rates will bring turmoil in markets

After a year of calling inflation "transitory," the Federal Reserve is finally catching up to normalise its monetary policy. With the unemployment rate dropping fast below 4 percent at the end of last year, it's fair to expect pre-pandemic unemployment conditions to be reached relatively soon. This leaves the central bank free to focus on more pressing issues such as inflation. Although price pressures are set to moderate this year, there are signs that they could remain sustained and above the Fed’s target for a long time. Wage growth continues to rise, supply-chain bottlenecks are likely to remain a problem until 2023, and productivity growth remains depressed. As political pressures to fight inflation mount, the Federal Reserve has been pushed to change its accommodative posture and turn more aggressive than the market originally forecasted; this has provoked the US yield curve to flatten considerably.

A flat yield curve is a problem for a central bank looking to hike interest rates because it exposes the economy to the risk on an inverted yield curve, which historically has been seen as a strong indication of an upcoming recession. Real yields had never been this low and deeply negative before the Fed began a hiking cycle. It may be why, in an attempt to steepen the yield curve, Fed members discussed reducing the Fed's balance sheet.

Everything points to the beginning of a bond bear market, which will see the US yield curve shifting higher while bear flattening. The short part of the yield curve will continue to rise amid more aggressive monetary policies. The long part of the yield curve will also shift higher, but at a slower pace, as yields remain compressed by a slowdown in growth expectations and an increasing demand for US Treasuries. We expect 10-year yields to find strong resistance at 2 percent and end the year not far from this figure.

Real yields will ultimately drive the rise in nominal yields. Indeed, as the Federal Reserve becomes more aggressive, breakeven rates decelerate. At the same time, nominal yields soar, accelerating the rise in TIPS yields. It is terrible news for risky assets, which currently continue to be underpinned by negative real yields but are facing the prospect of more stringent financing conditions.

Such a move will have profound consequences for the corporate bond space. Assets with high duration, such as investment-grade bonds, will need to be repriced. At the same time, junk bond spreads will widen amid more restrictive financing conditions as real yields approach 0 percent. That’s why we remain conservative and look at the corporate bond space opportunistically. The only way to successfully navigate these markets is to cherry-pick credits while taking the shortest possible duration and hold these bonds until maturity to avoid a capital loss. Although cash is toxic amid a high inflationary environment, it is wise to keep liquid to enter positions as new opportunities arise in the future.

Source: Bloomberg and Saxo Group.


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.