By Dhara Ranasinghe, Yoruk Bahceli and Stefano Rebaudo

LONDON (Reuters – After long-dormant inflation jumped, it’s been an incredible year for bonds. Central banks have begun to unwind unprecedented stimuli sparked COVID-19.

The European Union was a significant borrower, selling debt in excess of 140 billion euro. Britain and Italy also joined the green bond market. Junk debt saw a strong year.

These are some eye-popping moves from 2021.

SPEED UP AND GO

The 10-year Treasury yields rose by approximately 50 basis points. This is their largest annual absolute increase since 2013.

Treasuries are one of the 2021 worst-performing major bond market, as U.S. bonds have dropped 3%.

Ten-year yields of 1.42% are relatively low considering inflation which has risen to almost 7% in the past four decades.

However, with the Federal Reserve likely to accelerate its policy tightening by 2022 yields will rise above 2% in 2019.

(Graphic: US 10-year Treasury yields set for biggest annual fall since 2013, https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnlebkpq/UST2012.png)

EUROPE FOLLOWS

As the European Central Bank reduces its bond-buying stimuli, Italy’s yields on bonds are expected to see their second highest annual growth since 2011’s euro debt crisis.

The ten-year borrowing cost for a 0.95% loan is up by 40bps to 0.95% this year, which is not as dramatic as the jump of 78bps in 2018, when the markets were worried about Italy’s euro commitment.

Germany’s Bund 10-year yield rose only 20 basis points this year. It highlights the divergence in monetary policy between the euro zone and U.S., as well Omicron-triggered uncertainty.

(Graphic: Negative returns for most major bond markets in 2021, https://fingfx.thomsonreuters.com/gfx/mkt/myvmnalbapr/returnsdec21.PNG)

GOODBYE YCC, HELLO RAT HIKES

In November, Australia’s central banks abandoned an extremely low target for bond yields. This is known as yield curve control and it was a move towards unwinding the pandemic-era stimulus.

Expectations of tighter policy have driven up 3-year bond yields by 82bps to 0.92% for this year. It would represent the highest annual growth in 12 years.

The Bank of England surprised the British public by raising its interest rate this month. Two-year yields on bonds have seen their largest annual increase since 2006.

(Graphic: Britain’s two-year bond yield, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoxbqkpx/GB2012.png)

HEAVY HITTER

After issuing bonds for a fund to support a recovery fund after the pandemic, the European Union became a significant borrower. Its total debt reached 800 billion euro ($902 billion).

After raising additional 50 billion euros last year for SURE, the EU’s funding of the unemployment programme it began funding in 2013, the EU has now raised 91 Billion Euro in bonds and bills to fund the fund.

The world’s biggest green bond was also sold, raising 12 million euros in record-setting demand.

ESG BOOM

According to Refinitiv data, the green bond market is poised for another record-breaking year. It will nearly double from last year and reach $500 billion.

The first green bond issued by the EU, Britain, Spain, Italy and Spain was in 2005.

The scarcity has been reduced by green bond issuance, which in turn decreased the amount of “greenium” that investors must pay to acquire corporate green bonds.

Issuance of sustainability-linked bonds, linked to company-wide goals rather than specific projects, surged 11-fold to $91 billion, according to Refinitiv.

(Graphic: European ESG bond issuance share, https://fingfx.thomsonreuters.com/gfx/mkt/zgvomnddqvd/afme%20chart.png)

POPULAR

Investors have taken to inflation-linked bonds as protection against rising inflation.

According to BofA indexes, such bonds were second in fixed income market performance this year.

Market gauges that measure longer-term inflation expectations are also on the rise, both in Britain and in Europe.

(Graphic: Inflation forwards rise as price pressures surge, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkoxlnvq/inflation2021.png)

JUNK BONDS, HIGHER RETURNS

Triple C junk bonds and lower are likely to earn nearly 10% in the U.S. market and around 10% in Europe, according to BofA indexes. This is because investors have been grabbing assets with any potential return as inflation heats up.

Refinitiv reports that junk companies issued $646 billion in bonds due to attractive funding costs. It was a record second year, while investment-grade issuance fell.

Asia is the other place, with Evergrande property’s troubles affecting Chinese high-yield bond. According to BofA, the dollar-denominated currency market will suffer a 30% decline this year.

(Graphic: Evergrande woes crush China HY, https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrzmmkpm/china%20hy%20returns.png)