The bond market, the world’s largest, has been facing a relentless downward spiral since 2020. This ongoing rout has resulted in what is now considered the most severe bear market for Treasuries in history. Surprisingly, investors are not experiencing panic despite the selloff, according to Ben Carlson, a portfolio manager at Ritholtz Wealth Management.
Bank of America’s Michael Hartnett reveals that the U.S. Treasury market has been hit hard by continuous selling since its peak in 2020. From July 2020 to Halloween 2022, it has suffered a massive loss of nearly 25% on a total return basis. This downturn now holds the record for the deepest bond bear market in the United States’ almost 250-year history.
Notably, the yield on the 30-year Treasury bond (BX:TMUBMUSD30Y) has surged from a low of around 1% in March 2020 to nearly 5% over the course of three years. Furthermore, both the 10-year (BX:TMUBMUSD10Y) and 30-year yields have recently reached levels last observed during the financial crisis in 2007, as per FactSet data. It’s important to note that bond prices and yields move in opposite directions.
Despite being part of this unprecedented bond bear market, there is an absence of panic among investors. Ben Carlson, in his esteemed financial blog “A Wealth of Common Sense,” highlights this peculiarity. He states, “…some people are concerned about higher interest rates but it feels pretty orderly all things considered.”
Carlson offers a possible explanation for this calmness. Institutional investors, such as pension funds and insurance companies, dominate ownership of long bonds. Consequently, it will likely take a significant amount of time for investors to recover their losses. However, those who hold these bonds until maturity will eventually be repaid at par value.
Overall, while the bond market continues to suffer, the absence of panic suggests a certain level of orderliness amidst these tumultuous times.
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The Changing Landscape of Bond Investing
The recent selloff in Treasury bonds has sparked questions about the longevity of the bull market. With investors rethinking their fixed-income exposure, shorter-term bonds and Treasury bills have become a popular “escape hatch.” However, many may be misjudging the situation.
Despite the bond-market crash prompted by a hawkish outlook from the Federal Reserve, some believe that investors are prematurely pricing in the peak in interest rates. This continuous selloff indicates that a different approach may be necessary this time.
According to Carlson, there is a stark contrast between “ripping the band-aid off” and enduring “the death by a thousand cuts” during the previous bond bear market. While rates and inflation may continue to rise, higher interest rates now provide a margin of safety for investors.
Looking back at the bond bear market of the 1950s to the early 1980s, it becomes evident that slow inflation was responsible for eroding returns. Although annual nominal returns were positive at slightly over 2% per year, inflation remained in the 4-5% range throughout that period, resulting in a detrimental impact on real returns.
Recent data from the Labor Department indicates that inflation remains steady, with a rate of 3.7% in the 12 months ending in September. The “core” measure of inflation, excluding food and energy, also witnessed a slight decline from 4.3% to 4.1% on a year-over-year basis.
As market conditions evolve, U.S. Treasury yields have experienced an upward trajectory. The yield on the 10-year Treasury has risen by 9 basis points to 4.716% since Friday afternoon, while the yield on the 30-year Treasury jumped by 10 basis points to 4.872%, as per FactSet data.
In light of these developments, it is crucial for investors to reassess their bond investment strategies. While the landscape might be changing, opportunities still exist for those who adapt and approach fixed-income exposure with informed consideration.