With the Fed in full battle to break the current inflationary cycle, U.S. Treasury yields have surged over the past six months in anticipation of how high the Fed may need to go to be successful.
While bond investors may eventually benefit from higher interest rates, the short-term impact of higher yields is lower bond prices. The Bloomberg U.S. Aggregate Bond Index, made up of largely high-quality bonds, is down 12% this year. While a 12% decline is modest in comparison to the S&P down over 20% this year, in retirement plans, bond holders are largely participants closer to retirement.
While equity bear markets can extend for long periods and to deep depths, fixed income bear markets tend to be shorter in duration. The steep increase in treasury rates has been reflected in higher mortgage interest rates (30-year fixed above 5%) and this appears to have already begun cooling an overheated housing market.
The return to “par” for the bond market may take some time. The current yield on the Bloomberg Aggregate Bond Index is only 2%. So, if prices remain stable (they won’t) even with new investments at a higher interest rate, the recovery could take years.
While bond markets have declined, selling treasuries at depressed prices could be far more challenging for investors. As you sell at depressed prices you are left to determine how best to re-allocate during a period of high volatility in nearly all asset classes.
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