The stories and tales of the bond markets demise has been floating around for decades and after years (and weeks) like the ones just past, a couple visuals and links are worthy.
First from @biancoresearch (HERE) on 30yy dating back to 1973 — the worst week of TOTAL RETURN in 49yr history which had long bond -9.35%. NOT a typo, here’s his tweet — 3 of 14 (and LINK) for the visual,
@biancoresearch
3/14 The 30-year data goes back to 1973 and last week was the worst calendar week total return in at least 49-year history! The long-bond lost 9.35%!! If this was a year, a 9.35% total return loss would be the 5-year worst year ever. Impressive for five days of work.
That was long bonds … Again this shouldn’t be any surprise and if anything, should be welcomed AFFIRMATION as the world remains hating of duration (even though positions show shorts only just being built).
What hit inbox more recently is the hatred leaking over TO TIPS … which ALSO had a tough week and to say that just ahead of CPI, well … made me pause. Here is LPL with a visual …
… Treasury inflation-protected securities (TIPS) were one of the worst performing sectors last week. TIPS were the best performing sector last year and with inflation concerns still elevated and a Consumer Price Index release expected to show one-year price increases over 7% in December, demand for TIPS should have helped buffer interest rate risks. However, inflation-protected securities were hit hard. As seen in the LPL Research Chart of the Day, last week’s -2.2% drawdown was among the worst since the taper-tantrum in 2013 (aside from the Covid-19 lockdowns in 2020).
But keep in mind that while these price moves can be painful to experience, absent defaults, they are not permanent impairments of capital. That is, unlike in equities, investors that hold bonds until maturity are guaranteed their principal back and any contractually obligated coupon payments. As for TIPS, yields are still deeply negative (-1.3% for 5-year TIPS and -0.78% for 10-year TIPS), so as the Fed contemplates exiting the Treasury and mortgage markets, we’re likely to see additional price pressures for TIPS. Moreover, with inflation expected to moderate over 2022 and with Fed rate hikes likely this year as well, we could see TIPS underperform nominal Treasury securities.
There was nowhere to hide … For MORE of the context, see LPLs Wow, What a Year Last Week Was!and I’ll continue hiding under the rock from which I came. Until next post…
