Negative annual returns in U.S. Treasuries are rare, and when they do pop up, for a generation they’ve always been followed by a rebound. BlackRock Inc. and Vanguard Group Inc. see that relationship in peril next year.
The Bloomberg U.S. Treasury Index has returned minus 2.5% in 2021, poised for the first yearly slump since 2013. In records stretching back to 1974, it’s never fallen two years in a row. With yields still so low by historical standards and the Federal Reserve poised to jack up interest rates to battle inflation, some investors are bracing for more losses next year.
“A repeat of 2021 is a reasonable expectation for Treasury market returns in 2022,” said Jean Boivin, head of the BlackRock Investment Institute, the asset manager’s in-house think tank. “If inflation eases slowly from where it is at the moment, there is the risk of more downside performance in Treasuries next year.”
That would create a headwind for the popular 60/40 strategy, which distributes portfolios into both stocks and bonds, leaving investors relying on equities and riskier debt to generate positive returns.
Although valuations for both stocks and high-yield credit are expensive, BlackRock expects 2022 will deliver global stock gains and bond losses for a second straight year, the first such outcome based on the firm’s data going back to 1977.
