If every bond’s a winner, why so many losers?

If you bought bonds at the end of last year and just hung onto them, you probably have a little extra spending money in your pocket. In some cases, you may have cashed in big time.

Brazilian government bonds, for example, are up more than 10 per cent so far this year. Russian sovereign debt has gained more than four per cent, as have Japanese government bonds. Junk bonds globally are up more than three per cent, while longer-dated US Treasuries have generated a 7.6 per cent return.

The list goes on and on. The $47 trillion Bank of America Merrill Lynch Global Broad Market Index has gained almost three per cent in 2016, the biggest gain on record for a similar period in data going back to 1997. That has resulted in more than a trillion dollars’ worth of market gains, with just a few pockets of losses here and there.

This is great, right? Bond buyers are probably feeling pretty good about themselves, cashing in some chips, perhaps popping a little champagne. Or so you would think.

You’d be wrong. Debt traders seem pretty miserable, even more so than usual. Bond markets have stopped making sense. Trading is uninspiring or confusing. Prices are flipping and flopping, especially among riskier securities. This is because central bankers are driving almost all of the action, making it incredibly unpredictable. The European Central Bank, or ECB, decided to start buying corporate bonds, and the region’s credit markets suddenly experienced unprecedented distortions. Japan’s central bank has joined Europe in experimenting with negative-rate policies, and the region’s debt increasingly charges investors to hold it. The US Federal Reserve may raise its rates, or not, and markets whirl in response.

The result is that returns at non-traditional bond funds are slightly negative on average this year, and some have lost even more. The $82.5 million Altegris Fixed Income Long Short fund is down more than eight per cent and the Highland Opportunistic Credit Fund has lost more than six per cent year to date, according to data compiled by Morningstar and Bloomberg. Hedge funds have struggled, particularly in Europe, with Oceanwood Capital Management’s main $2.1 billion hedge fund losing 8.1 per cent through March 12 this year as just one example, according to Bloomberg News reporters Saijel Kishan and Nishant Kumar.

And then you have banks, which are racing to cut staff in the wake of fading trading profits, and insurance companies, which are struggling to generate sufficient returns on their assets.

So who’s reaping the spoils of this year’s bond rally? Well, the big winners are central banks of developed nations like Japan and the US along with the ECB. They own a lot of the sovereign debt that has experienced the biggest gains, so they win on that front. (For example, the Federal Reserve earned about $100 billion last year on the heels of its $4.5 trillion war chest of incomeproducing assets.)

And then there are companies that are borrowing at extremely low rates. European bonds of Siemens and Royal Dutch Shell, for example, are now trading with such high prices that they effectively have negative yields. Or, in other words, investors are basically paying for the privilege of lending to these highly rated companies. (And one of them is an oil company.)

And, of course, some fund managers did get it right. But even for those who have timed the market correctly, it’s getting more difficult for them to quickly cash out. If any big investors were to try to liquidate their holdings right now, there’s a good chance the market would move away from them, diminishing their returns in relatively thin trading. And if a central banker decided to come up with a new surprise that disrupted markets once again, they could easily be on the wrong side of the trade again.

So despite the latest rally, bond investors are feeling insecure. The gains can quickly turn to losses. And in any case, a lot of the moves are just paper gains and losses, reinforcing the sense that there’s so much funny money around that it’s hard to know what’s real.