The $41 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market index lost an average 1.4 percent in June. The MSCI All-Country World index of equities declined 3.1 percent as emerging markets erased 6.8 percent of their value. The Standard & Poor’s 500 fell for the first time in eight months. The U.S. Dollar Index ended 0.3 percent lower after falling as much as 3.5 percent.
U.S. central bankers could start reducing their $85 billion of monthly bond buying as soon as this year, Fed Chairman Ben S. Bernanke said June 19, prompting investors to recalibrate their outlook for economic growth. Stimulus efforts around the world have supported markets following the worst financial crisis since the Great Depression.
“The market had been pricing in that the Fed would normalize rates much more slowly than it has done historically, and clearly the market was taken aback,” Binky Chadha, the chief global strategist for Deutsche Bank AG, Germany’s biggest lender, said in a June 26 telephone interview. “That shock has spilled over across all of the asset classes. Everything is down.”

On Edge

Markets were already on edge as the World Bank cut its global forecast on June 12 after emerging nations from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction.
The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent and slower than last year’s 2.3 percent, the Washington-based bank said. It lowered its prediction for developing economies and said it sees the euro region’s gross domestic product shrinking 0.6 percent.
Bond losses in June as measured by the Bank of America Merrill Lynch index followed a 1.53 percent drop in May, capping the worst quarter on record with a 1.8 percent decline for the period in data going back to 1997. Fixed-income assets have dropped 1.27 percent this year, including reinvested interest, on track for the first annual decline since 1999, when they lost 0.26 percent. Yields have soared to 2.06 percent from May’s record low of 1.51 percent.

Sovereign Losses

The firm’s index of sovereign debt dropped 1.14 percent in June. Yields on U.S. Treasuries, German bunds and U.K. gilts due in 10 years or more are all above year-end projections, based on surveys of economists and strategists by Bloomberg News.
Global corporate bonds from the neediest to the most creditworthy borrowers fell 2.48 percent. That brought losses for the year to 1.44 percent, prompting a slowdown in debt sales to $911.5 billion last quarter from $1.09 trillion in the first three months of 2013, data compiled by Bloomberg show.
The Bloomberg USD Emerging Market Composite Bond Index (BEM), which includes sovereign and corporate debt, declined 4.39 percent in June, capping its second consecutive quarterly loss.
“Our outlook is for the developed market selloff to proceed at a far more measured pace over the remainder of the year,” Seamus Mac Gorain, a strategist at JPMorgan Chase & Co. in London, wrote in a June 26 report. “The position squaring in emerging markets likely has some way to go, not least because the degree of illiquidity in the selloff has come as a surprise.”

Bond Bulls

DoubleLine Capital LP’s Jeffrey Gundlach, whose bond fund has beaten 99 percent of rivals, said June 27 in a webcast to investors that the “worst is over” for Treasuries as stability returns to the stock and fixed-income markets.
Bond yields and risk spreads were too low two months ago and “the Fed tilted over-risked investors to one side of an overloaded and over-levered boat,” Bill Gross, manager of the world’s largest mutual fund at Pacific Investment Management Co., said in a July investment outlook note posted on Pimco’s website the day before. “Stay calm and don’t panic.”
In the $4 trillion-per-day foreign exchange market, the Dollar Index, which IntercontinentalExchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, rebounded from its lows on optimism the Fed may soon slow the pace at which it prints money to buy bonds for its quantitative easing stimulus.
While the index ended last month at 83.136, down from 83.375 at the end of May, it rallied from as low as 80.498 on June 19. The measure has risen 4.2 percent this year.

Rand, Yen