Last year was the worst for bond markets in more than a century and marked the end of a four-decade long “golden age” for the asset class which is unlikely to be repeated, according to a trio of academics.

Global bonds lost 31 per cent in 2022, the worst annual performance for fixed income in data stretching back to 1900, Dr Mike Staunton and professors Elroy Dimson and Paul Marsh wrote in Credit Suisse’s latest Global Investment Returns Yearbook.

UK bonds fared even worse, returning minus 39 per cent.

Those declines stand in stark contrast to the reliable returns that bonds recorded between 1982 and 2021, when the world bond index provided an annualised real return of 6.3 per cent, the authors said. Global equities returned 7.4 per cent per year over the same period.

But extrapolating the “astonishingly” high bond returns provided in the 40 years to 2021 into the future was “inappropriate” and “foolish”, the authors said, noting that since 1900 the average annualised real return for bonds across the 21 countries with continuous data was just 0.6 per cent. “For investors who had grown used to high bond returns and who saw bonds as a safe asset, [2022] returns were truly shocking.”

Column chart of Annualised real returns (%) showing 2022 was a disaster for bonds

It was not just bonds that endured a dire 2022, however. Equities, too, sold off sharply as high inflation forced major central banks to ratchet up interest rates at the fastest pace in decades, denting the allure of most risky assets and ending a bull market run that began in early 2020.

Equities and bonds do not typically move in tandem. While stocks tend to be volatile, bond returns over the past 40 years, excluding 2022, have proved relatively steady and a hedge against equity declines. Investors hoping to mitigate market risk have long exploited the negative correlation between the two by deploying 60 per cent of their funds into equities and 40 per cent into bonds.

Whether that strategy will once again bear fruit in 2023 after breaking down last year is a matter of hot debate.

Equities are expected to suffer if and when the global economy slides into recession, while cooling inflation would ordinarily boost the allure of bonds. Yet 58 per cent of institutional investors surveyed by asset manager Amundi and consultancy Create Research in January said that the pattern of 2022 would persist this year.

Even if bonds regain their role as a cushion against stock market losses, investors should not bank on equity-like returns from fixed income, Staunton, Marsh and Dimson said. “Golden ages, by definition, are exceptions. To understand risk and return in capital markets, we must examine periods much longer than 20 or even 40 years.”



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