Bonds Rose Last Week As Risk-Off Sentiment Returned

Amid news of rising coronavirus cases in the US and elsewhere last week, investors favored bonds at the expense of risk assets, based on a set of exchange traded funds representing the major asset classes for the trading week through June 26.

Inflation-linked government bonds outside the US led the fixed-income rally last week. SPDR FTSE International Government Inflation-Protected Bond (WIP) rose 0.8%. The advance marks the fund’s first weekly gain in three weeks.

US inflation-indexed Treasuries were last week’s third-best performer. The iShares TIPS Bond (TIP) rose 0.4%, the ETF’s third straight weekly gain that boost TIP to a record close.

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Driving demand for inflation-linked bonds: renewed worry that inflation may be a rising risk in the years ahead, thanks to a recent surge in fiscal and monetary stimulus in the US and around the world to combat the economic loss due to Covid-19. In the shorter term, however, disinflation/deflation may prevail if the aftershock of the coronavirus blowback lingers.

“We are going to be facing now a significant amount of supply shocks in the global economy,” predicts Nouriel Roubini, a professor of economics at New York University. “Eventually the inflation genie is going to get out of the bottle.”

Last week’s biggest loser: US-listed real estate investment trusts (REITs). Vanguard Real Estate (VNQ) lost 4.0% — the third weekly decline for the fund.

For the major asset classes generally, prices fell 1.5%, based on the Global Markets Index that uses exchange-traded funds (GMI.F). This unmanaged benchmark, which holds all the major asset classes (except cash) in market-value weights via ETFs, has lost ground in two of the past three weeks.

For the one-year trend, US investment-grade bonds are still the top-performer and continue to hold a small lead over the number-two one-year gain via inflation-linked Treasuries. Vanguard Total Bond Market (BND) is ahead by a solid 9.4% over the trailing 12-month period, based on total return. The iShares TIPS Bond (TIP) is a close second with an 8.6% gain.

Broadly defined commodities continue to post the deepest one-year loss by far for the major asset classes. The iShares S&P GSCI Commodity-Indexed Trust (GSG) is off more than 38% at Friday’s close vs. the year-earlier price.

GMI.F’s one-year return is a modest 2.2% increase.

Ranking asset classes by current drawdown continues to show a wide range of results, ranging from a 70%-plus peak-to-trough decline for commodities (GSG) to the zero drawdowns for US investment-grade bonds (BND) and inflation-indexed Treasuries (TIPS).

GMI.F’s current drawdown: -7.3%.

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