Bonds Booming in 2023 After Worst Year Ever

After a historically lousy year for bonds, fixed income markets are off to their best start to a year ever in 2023, buoyed by higher yields, falling inflation, and bonds' traditional role as recession havens.

The Bloomberg Global Aggregate bond index rose 3.7% in 2023 through Thursday after a 16% decline last year. The S&P U.S. Aggregate Bond Index fell 12% in 2022 and is up 3.1% since. That compares with the 3.5% advance by the S&P 500 index and a rise of 6.4% for the Nasdaq so far this month.

Investors boosted their U.S. bond fund holdings for a second week as of Jan. 18. The week of Jan. 11 saw the highest weekly inflows into global bond funds in 20 months. The hunt for yield among junk bonds has turned the iShares iBoxx High Yield Corporate Bond ETF (HYG) into an early 2023 standout.

The increased appetite for bonds has been sufficient to fuel price gains even as governments and companies sold almost $600 billion of debt, a record this early in the year.

Global bonds have been rallying since late October and U.S. fixed income markets since early November amid multiple indications inflation is fading fast from the 40-year highs reached last spring.

Weaker economic data since a strong December jobs report has aided the gains. The yield on the 10-year U.S. Treasury note, which moves inversely to price, set a four-month low last week after disappointing monthly retail sales and industrial production numbers and mounting layoff announcements by leading tech companies.

Another factor fueling bonds' fast start has been the heavy short-covering in Treasuries by institutional traders. While that trend may not last, a reversion of last year's revulsion with bonds could prove more durable. Investors pulled a record $335 billion from U.S. bond funds last year. While bonds have returned 4.5% annually on average, they've returned an average of 7.6% in years following the 10 largest annual fund outflows, according to BlackRock.