Consider this a reminder that you’re living through one of the worst bond market crashes in history.
It may be easy to forget that fact. Coverage of the bond market doesn’t kick off any nightly newscasts. We don’t see any images of ashen-faced bond traders emerging from office towers with banker’s boxes in their hands. And few retail investors are likely tracking their paper losses in bond holdings by the hour.
When the stock market ruptures, everybody knows it. They are noisy, all-consuming ordeals that leave financial and psychological scars for years to come.
Plenty of investors can keenly recall the global financial crisis, or the bursting of the dot-com bubble, or Black Friday – the sheer panic and contagion.
What is striking about the global rout in bonds is how calm it seems. Three years in – depending on how you measure it – and nobody seems to be freaking out.
Stock prices have dipped over the past few months, but the S&P 500 index is still up by 8 per cent on the year. Volatility indicators have been fairly contained. And confidence in a soft landing for the global economy has grown.
iShares 20+ Year Treasury Bond ETF
Daily close, in U.S. dollars
$180
160
140
120
100
-51.3%
80
2019
2020
2021
2022
2023
iShares 20+ Year Treasury Bond ETF
Daily close, in U.S. dollars
$180
160
140
120
100
-51.3%
80
2019
2020
2021
2022
2023
iShares 20+ Year Treasury Bond ETF
Daily close, in U.S. dollars
$180
160
140
120
100
-51.3%
80
2019
2020
2021
2022
2023
THE GLOBE AND MAIL, SOURCE: refinitiv eikon
But don’t be lulled into complacency by the low tenor of the moment. There is much turmoil in bondland, and it affects pretty much everyone, eventually.
This past week saw the U.S. debt market hit a threshold that would have seemed far-fetched just a couple of years ago. The yield on 10-year U.S. Treasuries pushed through the 5-per-cent mark momentarily on Monday. That hasn’t happened since 2007.
U.S. bond yields are crucial benchmarks on a universal scale, helping establish pricing on loans and securities around the world. A sharp rise in yields has a great dampening effect that permeates the global economy. It puts downward pressure on risk assets of all kinds, from stocks to commodities to cryptocurrencies. Existing bonds get devalued, since prices and yields move in opposite directions, dealing a blow to the retirement plans of countless everyday investors. And it gets more expensive to take out a mortgage, or pay the interest on government debt, or finance a corporate takeover.
Just more than three years ago, the U.S. 10-year yield was as low as 0.5 per cent, after falling for most of the previous four decades. It was easy to believe that cheap money was a permanent feature of the modern financial system.
Ferocious inflation put an end to all that. And now, a “5-per-cent world” is upon us, to quote Bank of America strategists. In debt markets, the adjustment to that new reality has been violent.
Longer-term government bonds in particular have been hammered.
Ten-year U.S. Treasuries peaked in July, 2020, and have lost roughly 25 per cent of their value since. Trying to find a comparable selloff will lead you on a futile search through the dusty annals of U.S. financial history.
The closest precedent is a 19-per-cent drop that began in 1860, just before the start of the U.S. Civil War, according to Bank of America, which concluded that today’s bond selloff ranks as “the greatest Treasury bear market of all time.”
It’s an even worse state of affairs for bonds with longer durations, where losses are on the same order of magnitude as the worst stock market crashes.
The iShares 20+ Year Treasury Bond ETF, for example, has more than US$40-billion in assets under management, and is closely watched in bond circles. It is now down by 51 per cent in a little more than three years. A comparable Canadian fund, the BMO Long Federal Bond Index ETF has lost 45 per cent.
“I promise you, if the equity market lost anything like that, you would hear about it,” said Ian Pollick, head of fixed income, currency and commodities strategy at Canadian Imperial Bank of Commerce.
BMO Long Federal Bond Index ETF
Daily close
$22
20
18
16
14
12
-45.2%
10
2019
2020
2021
2022
2023
THE GLOBE AND MAIL, source: refinitiv eikon
BMO Long Federal Bond Index ETF
Daily close
$22
20
18
16
14
12
-45.2%
10
2019
2020
2021
2022
2023
THE GLOBE AND MAIL, source: refinitiv eikon
BMO Long Federal Bond Index ETF
Daily close
$22
20
18
16
14
12
-45.2%
10
2019
2020
2021
2022
2023
THE GLOBE AND MAIL, source: refinitiv eikon
Why the lack of panic about the bond bear market? One explanation is that the average investor is far more attuned to the ups and downs of the stock market. There is an emotional attachment.
An investor whose retirement is still several years off typically has more at stake in stocks than in fixed income instruments. And ETFs and discount brokerages have made stock trading accessible to anyone who cares to try it out.
Even though the bond market is the largest securities market in the world, supplying the lifeblood for the global economy, a lot of bond trading is still done over the phone. Most long-term bonds are held by governments and banks and pension funds. Retail investors hold a very small portion of outstanding long-duration bonds.
For the everyday investor, the bond market is less visible, operating more in the background. Many give little thought to the bond component of their portfolios, beyond setting an appropriate percentage for diversification purposes.
That approach made sense for many years. Bonds have traditionally acted as a stabilizing force when the stock market was having a crisis moment. That dynamic, too, has been upended in this new era of higher-for-longer rates and yields.
Stocks and bonds these days tend to move in unison, with both falling when investor sentiment sours.
“I don’t think the fixed income market is dead by any means,” Mr. Pollick said. “But I do think that we’ve gone through a very serious calibration, that will have a long-lasting impact on how portfolios are constructed.”