Fading Hopes of a Fed Cut Wipes Record $327 Billion From Bonds

January’s optimism about the bond market seems like a long time ago.

The best corporate bonds have erased almost all of their early-year gains as stubborn inflation data lead traders to reverse course on the timing of rate cuts by central banks. Total return from that debt is now just 0.67% since the start of 2023 following the worst February on record, according to Bloomberg indexes.

It’s a remarkable turnaround for high-grade bonds, after a record jump in January in the same metric. Lingering inflation and the fading likelihood of a Federal Reserve rate cut this year risk flipping the “year of the bond” narrative that suggested buyers of the safest credit couldn’t go wrong thanks to the highest yields in about a decade.

“The risks are skewed to the downside: spreads should go wider,” said Viktor Hjort, global head of credit strategy and desk analysts at BNP Paribas SA. “There’s been a nice growth narrative of late but I’m concerned that the market underestimates the fact that most policy tightening in the US and Europe has yet to hit the economy and corporate fundamentals.”

Four weeks since the market’s peak on Feb. 2, the global high-grade bond market has lost almost $327 billion in value, more than the gross domestic product of Chile. The market took another leg down on Tuesday, with data showing everything credit bulls hoped to avoid.