Bond market’s weakness for such a long stretch is ‘unprecedented,’ Bespoke finds
Bond market’s weakness for such a long stretch is ‘unprecedented,’ Bespoke finds
Bonds are kicking off July with losses as yields climb following an extended rough stretch for long-term Treasurys.
“Bonds have been swirling down the toilet,” investment-research firm Bespoke Investment Group said in a note emailed Monday.
Over the last year, the BofA 10+ Year U.S. Treasury Index has slid 5.1% on a total-return basis, the note showed. “Annualized returns over the last two years have been even worse at a decline of 6.1%, and in the previous five years, the annualized decline has still been negative at 4%.”
The U.S. bond market has struggled in the wake of surging inflation that the Federal Reserve has been battling for more than two years. While the inflation rate has eased substantially from its June 2022 peak, its stickiness has kept many investors on edge in the volatile bond market.
On a year-over-year basis, Bespoke found just “one month in the previous 41 where returns have been positive” for the BofA 10+ Year U.S. Treasury Total Return Index since 1978.
“Relative to history, this type of consistent weakness for such an extended period has been unprecedented,” Bespoke said of long-term Treasurys. “The only other period where there was any sort of consistent weakness was from October 1979 through October 1981.”
The yield on the 10-year Treasury note was trading about 11 basis points higher Monday afternoon at around 4.48%, according to FactSet data, at last check. Bond yields and prices move in opposite directions.
Jim Smigiel, chief investment officer at SEI, said in an interview Monday that he expects the 10-year yield will rise to around 5% by the end of 2024 as inflation will probably stay “sticky.”
Still, he said he anticipates the Fed will start cutting interest rates this year as parts of the economy, like manufacturing, are under pressure after the central bank’s rate hikes aimed at combating elevated inflation in the U.S.
Read: Manufacturers are mired in a slump, ISM finds, and aren’t adding much to the U.S. economy
Inflation has also created stress for lower-income consumers in particular, Smigiel noted. But more broadly, “the economy has been shockingly resilient” following the Fed’s rate hikes, he said. The U.S. unemployment rate has been historically low, standing at 4% in May.
On Friday, the Bureau of Labor Statistics will release a report on U.S. jobs growth in June.
Although many traders expect the Fed could lower its benchmark rate as soon as September, Smigiel thinks that’s probably “a little too soon.”
After a volatile first half of 2024 for fixed income, he anticipates more “trouble” ahead for the U.S. bond market broadly for the rest of the year.
The iShares Core U.S. Aggregate Bond ETF kicked off July with declines on Monday, after a booking 0.7% loss in the first half of 2024 on a total-return basis, FactSet data show, at last check. Shares of the ETF, which tracks a broad index of U.S. fixed-income assets including Treasurys and corporate bonds, were down 0.6% Monday afternoon.
Meanwhile, the Vanguard Long-Term Treasury ETF was down a sharp 1.8% in afternoon trading, after slumping 4.7% on a total-return basis in the first half of 2024.