Data provided shows that after peaking in March 2020, bonds maturing in 10 years or more have fallen 46%. That is just marginally less than the 49% decline in US stocks that followed the dot-com bust at the turn of the century. Even worse, 30-year bonds have lost 53% of their value, almost matching the 57% decline in equity prices that occurred at the height of the financial crisis.
The size of the losses serves as a harsh reminder of the danger involved in buying more long-term bonds, whose prices are more susceptible to changes in interest rates. As the Federal Reserve spent the greater part of a decade reducing borrowing costs to almost zero, that was part of the assets’ attractiveness.
However, the combination of historically low beginning yields, long-maturity debt, and quickly rising rates has proven to be a costly one as the central bank has implemented the most extreme tightening of monetary policy in decades to control runaway inflation.
“It’s quite something,” remarked Thomas di Galoma, co-head of global rates trading at BTIG and a four-decade market veteran. To be very honest, I never imagined seeing 5% 10-year notes again. After the global financial crisis, we were locked in a situation where everyone assumed that interest rates would stay low.
The losses in long-maturity debt currently are more than twice as large as the next worst downturn in 1981, when Paul Volcker, the then-Chairman of the Federal Reserve, drove 10-year rates to around 16% in an effort to stop inflation.
It also outperformed the 39% average loss in seven US equity bear markets since 1970, including the 25% decline in the S&P 500 that occurred last year when the Fed began to raise interest rates from near zero.
The collapse in the price of the 1.25%, 30-year Treasury issued in May 2020 is arguably the single best illustration of the excruciating suffering imposed on investors. Since its issuance, the bond’s value has decreased by more than half, and it currently trades for about 45 cents on the dollar.
Wednesday marked a break from the recent weeks’ constant selling pressure for long-end buyers. Ten-year rates originally increased to a high of 4.88%, but a spectacular rally throughout the US session caused them to drop by approximately six basis points to 4.73%. Yields on 30-year bonds peaked at 5% before falling to about 4.86%.
Di Galoma declared, “A lot of portfolios are suffering.” “You’ve witnessed some impressive movements, but they never seem to stick. This time, it’s simply going on. Here, it’s a little like defying gravity.