Bonds Extend Rally Amid Fears Of Bank Crisis

Bond prices continued to rebound last week as investors worried that the turmoil in the banking sector could spread.

Government bonds in developed markets ex-US posted the strongest gain for the major asset classes in the trading week through Friday, Mar. 17, based on a set of ETF proxies. US stocks and bonds also rose while foreign equities and commodities suffered the biggest losses.

SPDR Bloomberg International Treasury Bond ETF (BWX) rallied 3.4% last week. The gain was partly fueled by a weaker US dollar in foreign exchange markets. The US Dollar Index fell for a third week as it traded near its lowest level in nearly a year.

The biggest loser last week: foreign stocks in developed markets ex-US. Vanguard Developed Markets Index Fund (VEA) fell 2.0%.

US equities, by contrast, rose last week. Vanguard Total US Stock Market (VTI) clawed back some of the sharp losses booked in the previous week with a 1.0% rally.

Despite last week’s rally in US shares, traders at JP Morgan advise that stocks are still vulnerable. “Longer-term, to achieve a rally, we need inflation materially lower (say 3.5% or less), earnings to accelerate higher, and you need the banking crisis solved,” they write. In the near-term, however, macro headwinds are lurking. “A recession seems to be a certainty given the banking crisis and the expectation for additional ‘unknown unknowns’ to emerge. Combined, this feels like another bear market rally rather than the beginning of a new bull market.”

The Global Market Index (GMI.F) rose last week, rebounding modestly with a 0.5% gain following a sharp decline previously. This unmanaged benchmark holds all the major asset classes (except cash) in market-value weights via ETFs and represents a competitive measure for multi-asset-class-portfolio strategies.

All the major asset classes continued to post losses for the trailing one-year trend. The deepest one-year loser: global real estate shares ex-US via Vanguard Global ex-US Real Estate Index Fund (VNQI), which is closed down nearly 22% on Friday vs. the year-ago level after factoring in distributions.

GMI.F is also in the red with an 8.9% loss over the past 12 months.

Comparing the major asset classes through a drawdown lens continues to show relatively steep declines from previous peaks for markets around the world. The softest drawdown at the end of last week: US inflation-indexed Treasuries (TIP), which ended the week with a 10.9% peak-to-trough loss.

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