Bonds’ Losses This Year Have Been Truly Historic

Bonds’ Losses This Year Have Been Truly Historic
Andrew Rummer

about 3 years ago1 min

Bonds are supposed to be the safe, boring cornerstone of any balanced investment portfolio. 

But bonds have an Achilles heel: inflation. Inflation is poison to the bond market – because bonds pay a fixed return to holders, any pick-up in inflation will erode the value of future payments. 

Signs that the US economy may rebound strongly from the coronavirus pandemic, fueled by trillions of dollars in government stimulus spending, are pushing investors to sell bonds in anticipation of inflation. And, as the chart above from Arbor Data Science shows, that’s leading to a terrible start to the year for long-term bond prices – equalled only by 1980 and 2009. 

US government bonds (a.k.a. Treasuries) have dropped so much despite US inflation being well below the Federal Reserve’s 2% target – which initially appears a little puzzling. But look closer and you can see how ripe for a pull-back Treasuries had become after years of steadily rising prices and falling yields.

The chart below from Yardeni Research uses the reciprocal of the yield on 10-year US Treasuries as a proxy for the price-to-earnings (P/E) ratio of the stock market. While US stocks are historically expensive, with a P/E ratio of 22, the equivalent metric for Treasuries was recently as high as 180

Chart of bond valuations versus stock valuations
Source: Yardeni Research, Refinitiv

If you think investors are getting ahead of themselves and the four-decade trend of Treasury prices grinding higher will continue over the longer-term, the iShares 20+ Year Treasury Bond exchange traded fund(often known by its ticker, TLT) is down 11% so far this year and might start looking tempting before long…



All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG