about 2 months ago • 2 mins
The Federal Reserve’s (the Fed’s) most aggressive rate-hiking run in decades, coupled with low initial bond yields and a growing government budget deficit, has resulted in huge losses in the Treasury market over the past two years. The brunt of this impact has been felt in long-term bonds, which are highly sensitive to changing interest rates and are now facing losses comparable to some of the most significant market downturns in US financial history.
Bonds with maturities of ten years or longer have declined by a stunning 46% since their peak in March 2020, according to Bloomberg data. That’s only just shy of the 49% drop in US stocks following the burst of the dot-com bubble at the start of the century. The rout in 30-year bonds has been even steeper, with a 53% fall. That’s close to the 57% drop in stocks at the height of the global financial crisis.
What’s more, the current losses in long-term Treasuries are more than double their next biggest decline, which happened in 1981 when the US central bank’s war against inflation pushed ten-year yields to nearly 16%. (Remember, bond prices fall as their yields rise.) Today’s losses also eclipse the average 39% drop seen in seven US stock bear markets since 1970, including the 25% drop in the S&P 500 last year when the Fed began raising its key rate from near zero to more than 5% today.
The key takeaway here is that while US government bonds are considered to be among the safest investments, the ones with long maturities can be volatile and prone to big drawdowns. The longer the maturity of the bond, the greater its sensitivity to changing interest rates. So while these bonds perform particularly well when rates are falling, they often get hammered when central banks are aggressively hiking rates.
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