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The ongoing rout in the world’s biggest bond market since 2020 is causing the greatest Treasury bear market of all time, but investors don’t seem to be panicking about the selloff, said Ben Carlson, portfolio manager at Ritholtz Wealth Management.
The U.S. Treasury market has been hammered by repeated selling since its peak in 2020, losing nearly 25% on a total return basis between July 2020 and Halloween 2022, according to Bank of America’s Michael Hartnett. That also ranks as the deepest bond bear market in the nearly 250-year history of the U.S., Hartnett said in a note from early October.
See: Treasury-market selloff has become the worst bond bear market of all time, according to BofA
For example, the yield on the 30-year Treasury bond
BX:TMUBMUSD30Y
has gone from a low of around 1% in March 2020 to nearly 5% more than three years later. Since late September, both 10-year
BX:TMUBMUSD10Y
and 30-year yields have touched levels last seen when the economy was moving toward the financial crisis in 2007, according to FactSet data. Bond prices and yields move in opposite directions.
“One of the strange parts about living through the worst bond bear market in history is there doesn’t seem to be a sense of panic,” Carlson wrote in his popular daily financial blog “A Wealth of Common Sense” on Friday. “… some people are concerned about higher interest rates but it feels pretty orderly all things considered.”
“It could be that there are more institutional investors in long bonds than individuals — there are lots of pension funds and insurance companies that own these bonds,” Carlson said. “It’s going to take a very long time for investors to get made whole but you can hold these bonds to maturity to get paid back at par.”
See: Why Treasurys could give the U.S. stock market a green light for a year-end rally
Another reason could be that many individual investors have had an “escape hatch” in shorter-term bonds or Treasury bills, so they do not need to hold longer-term bonds for their entire fixed-income exposure, Carlson said.
The continuous selloff in Treasurys proves some investors might be wrong in pricing in the peak in rates despite the bond-market crash fueled by a hawkish outlook from the Federal Reserve since late September.
However, Carlson said “ripping the band-aid off” this time should be preferable to investors as opposed to “the death by a thousand cuts” during the previous bond bear market. “Sure, rates and inflation could keep going up from here, but interest rates are now much higher to act as a margin of safety,” he said.
The bond bear market of the 1950s through the early 1980s, in which the yields went from 2% to 15% in a little over 30 years, was more “a death by a thousand cuts” as the source of those cuts was inflation. “Sure, annual nominal returns [for bonds] were positive at a little more than 2% per year, but inflation was in the 4-5% range over that period.”
The rate of inflation in the 12 months ending in September remained steady at 3.7% from August, the Labor Department said Thursday. The closely watched “core” measure of inflation that omits volatile food and energy rose 4.1% from 4.3% on a year-over-year basis.
U.S. Treasury yields were rising on Monday early afternoon, with the yield on the 10-year Treasury up 9 basis points to 4.716% from 4.628% Friday afternoon, while the yield on the 30-year Treasury jumped 10 basis points to 4.872%, according to FactSet data.
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