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Bonds Extend Rally Amid Fears of Bank Crisis

Published 20/03/2023, 11:57 pm

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

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

BWX Weekly Chart

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

U.S. equities, by contrast, rose last week. Vanguard Total Stock Market Index Fund ETF Shares (NYSE:VTI) clawed back some of the sharp losses booked in the previous week with a 1.0% rally.

Despite last week’s rally in U.S. 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.

GMI ETFs Weekly Total Returns

All the major asset classes continued to post losses for the trailing one-year trend. The deepest one-year loser: global real estate shares via Vanguard Global ex-U.S. Real Estate Index Fund ETF Shares (NASDAQ:VNQI), which 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.

GMI ETFs Yearly Total Returns

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: U.S. inflation-indexed Treasuries (NYSE:TIP), which ended the week with a 10.9% peak-to-trough loss.

Drawdowns Distribution Histories

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