ANGELA WEIS/AFP/GETTY IMAGES
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Treasuries are selling out, yields are rising sharply, and bond funds are suffering.
Notably, safer bond funds—in Morningstar’s “Intermediate Core” and “Core Plus” categories—have declined an average of 6.3% for the year since Tuesday, according to data from the fund tracker.
Riskier high-yield bond funds have outperformed, even though investors typically buy core bond funds to protect against stock-price declines. Morningstar’s high-yield bond category funds have lost an average of 4.7 per cent. It also means that high-yield bond funds have marginally outperformed the S&P 500’s 5% year-over-year loss as of Wednesday morning.
While this may sound paradoxical, this disparity underscores a major risk to global markets today: the tightening of the Federal Reserve and its impact on longer-term bonds, or higher sensitivity to interest rates. Duration and maturity are related but not the same, so bonds with longer maturities have longer periods and experience greater losses when the Fed raises rates.
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This means that bonds from safe-haven issuers – such as the highest-rated governments and companies – are at greatest risk because of their security. They can borrow for longer periods at lower returns, which means they suffer the most when interest rates rise. Riskier borrowers in a high-yield market have higher coupons and shorter maturities, so they have shorter periods (and less sensitivity to interest rates).
This dynamic is also reflected in the relative performance of various bond-market ETFs. That’s why the iShares 20+ Year Treasury Bond ETF (ticker: TLT) is down about 13% so far this year, while the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) is down 10% and the iShares iBoxx $ High Yield Corporate Bond The ETF (HYG) dropped nearly 5.9%
Another good example is the Austrian 100-year bond, which was issued in 2020 with a coupon of 0.85%. An investor who bought the bond on December 31 would have lost about 25% so far this year, according to data from Bloomberg. Despite the loss, it is now giving 1.5% return.
Treasuries look better, with the 30-year yield exceeding 2.5%. And broadly speaking, secured bonds pay higher since 2019 than they are today. So investors who haven’t battled the Fed — who bought riskier investments while central banks were resting and can buy bonds now that yields are higher — may ultimately win.
Write to Alexandra Scaggs at [email protected]
