The 10-year U.S. Treasury note that debuted in August 2016 when the bond market was near its peak has had a rough ride, its price falling ever since and no reprieve in sight.
Welcome to the new U.S. Treasury market, where 75 percent of existing government bonds are now trading below par.
Despite high demand at auction, the price of the August 2016 bond began falling the day it hit the open market, roughly a month after benchmark 10-year yields reached historic lows. Now priced at 10 points below face value, it yields 2.833 percent, almost double its record-low 1.50 percent coupon, meaning so far a negative total return of around 8 percent. Unless prices rebound, fixed-income investors could be nursing sustained losses for the first time since a bull market in bonds took hold 30 years ago.
Over the past two decades relief came every time more than half of bonds traded at a discount as that coincided with peaks in Federal Reserve policy rates, which were followed by an easing cycle, an analysis of the ICE Bank of America/Merrill Lynch Treasury index shows.
This time, there are signs the sea of red in Treasury bonds could signal a bear market rather than offer a chance to scoop up bargains.
"The market is trying to figure out if this is a buying opportunity or not," said Donald Ellenberger, senior portfolio manager and head of multi-sector strategies group at Federated Investors, Inc.
For one, there has not been this much debt trading below face value since the data began being recorded in mid-1980s, according to Jeff Mills, co-chief investment strategist at PNC Financial Services Group.
This is a result of a long spell after the global financial crisis when bonds were issued at ultra-low rates, so those which still trade do so at deep discounts to match returns of newer issues. But since such "off-the-run" issues are less sought after than new bonds and so many of them are underwater, their prevalence weighs on overall liquidity — the ease with which securities trade without affecting prices.
Then there are widespread expectations that the Fed, which started raising rates in December 2015, has some way to go. Markets continue to price in two more rate increases this year, given the Fed's inflation gauge hit its target for the first time since 2012 and economic growth remains strong.
Finally, a once-in-a-generation shift in the balance of supply and demand may make bonds harder to trade, possibly hitting their prices, some investors say.
While the Fed unwinds its crisis-era policies by paring back its bond purchases and shrinking its $4 trillion portfolio, the Treasury is ramping up borrowing to fund $1.5 trillion in tax cuts President Donald Trump signed into law last December.
It is unclear whether sufficient demand exists to soak up the supply, with government debt sales estimated to reach $1.3 trillion in 2018, more than double last year's figure, according to JPMorgan.
Such a spike in supply of new debt could mean that off-the-run securities, despite hefty discounts, could struggle to find buyers. A widening of spreads between yields offered by off-the-run bonds and the newest securities already suggest growing concerns about the market's liquidity.
Since off-the-run securities trade less — they make up 98 percent of the $14.5 trillion Treasury market but only a third of its daily trading volumes — they offer a yield premium to new issues and that premium has risen for most maturities.
For example, the yield premium on the two-year note was negative at the beginning of the year, and has risen by 0.68 basis point since Jan. 5 to 0.58 basis point on July 6.
"The risk is — with the off-the-runs, the cycle and the issuance — that the stage could be set ... for a liquidity crisis," said Josh Holden, chief information officer at OpenDoor.
Since all issues become off-the-run at some point, liquidity concerns could spread throughout the market, potentially raising the U.S. government's borrowing costs. It has not happened yet and some analysts argue demand for Treasuries both at home and abroad should remain strong given a lack of alternatives, but others say the market has already become less liquid.
"It is getting harder to transact, even in the most liquid market in the world, relative to past experiences," said bond market veteran Gregory Peters, senior portfolio manager at PGIM Fixed Income, the asset management arm of Prudential Financial.