A brutal bond market sell-off wreaks havoc on one of fixed income's most popular ETFs

Published Tue, Apr 19 20223:54 PM EDTUpdated Tue, Apr 19 20226:24 PM EDT

Things are getting pretty bad for 30-year Treasury bonds, the prices for which are plumbing depths not seen since the early days of the Covid crisis. Specifically, a popular ETF that tracks the long bond continues to see a price plunge that has carried it to a year-to-date slide of more than 18%. The reasons for the tumble are manifest: inflation fears that eat into fixed income, particularly at the far end of the curve; an unfriendly Federal Reserve that is battling price hikes with interest rate increases ; and a seismic shift in global bonds that has seen negative nominal yields fade dramatically from the landscape. "You can't just analyze the U.S. Treasury market looking at inflation and growth," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "You have to understand that we had a mega bond bubble particularly in Europe and Japan that is now showing signs of leaking air, and that's going to have a direct influence on U.S. Treasurys." Indeed, 2022 has seen a huge swing in bonds, with yields around three-year highs that threaten to finally take the air out of what had been an impenetrable trade. Negative-yielding sovereign debt topped $18 trillion in 2020 but is now down to just $2.68 trillion, reflecting the global inflation trend that has seen rates skyrocket in relative terms over the past several months. In the U.S., the 30-year bond yield on Tuesday briefly scraped above 3%, the highest level since around April 2018. Markets expect the Fed to bring its benchmark funds rate to about 2.5% by the end of the year, from near-zero to start 2022. Because prices move in the opposite direction, rising yields hammer ETFs such as the iShares 20+ Year Treasury Bond . As of Monday's close, the $18.6 billion TLT fund had plunged 22.2% from its Dec. 5, 2021, high, squarely in bear market territory. The fund is a bellwether for a bond market that has sustained a beating as a new investing paradigm takes hold. It is the largest long-bond fund and the 16th biggest fixed income ETF by assets. Bear market takes hold "The bond market is in a bear market now," said George Bory, chief investment strategist for fixed income at Allspring Global Investment. "There are some fundamental and technical factors driving things. The most obvious is inflation and expectations about inflation," he added. "Folks are hoping that inflation is starting to peak. But the rate of inflation is still well above nominal yields, and I think as long as that persists, the support for Treasurys, the support for fixed income, is going to be challenged." Bory said he expects rates to continue drifting higher even with the rapid rise so far this year. That means a 10-year yield cresting up around 3%, which is considered a testing ground for where the bond market starts to have a negative impact on stocks. "The technical backdrop has not been great so far," he said. "You're taking out some of the more statistically important support levels, which would suggest that bond yields can still move higher." That has investing experts cautioning clients about risk in fixed income. "We don't plan to add duration back to our portfolios until the hiking cycle is further along and we see continued evidence that interest rate expectations have peaked, instead maintaining our overweight in short-duration high yield but an underweight in aggregate fixed income," Lauren Goodwin, economist and portfolio strategist at New York Life Investments, said in an email. Money keeps flowing in Despite the market tumult, investors have continued to plow money into bond funds. The TLT alone has pulled in more than $2.5 billion this year in net inflows, a gain of about 16% in total assets, according to FactSet. The iShares 7-10 Year Bond ETF has pulled in $527.2 million, or about a 3.3% increase in assets, despite falling more than 10% in value this year. Investors' willingness to jump into long-dated bonds despite all the headwinds has some market professionals concerned. "That smacks of the speculative buy-the-dip mentality," said John Kicklighter, chief strategist at DailyFX. "This is not a traditional post-pandemic buy the dip. This is not a prepandemic, post-Great Financial Crisis buy the dip. This is really a substantial pullback and rebalancing." Kicklighter said the trade is being pushed not just by "deep-pocketed global fixed income investors" but also by the retail crowd looking for a way to get in on a fast-moving trade. "You're not trying to pick a top in this case, you're trying to pick a bottom," he said. "But picking a bottom is fraught with risk. It's not something you should do lightly and with speculative purpose for a quick return."

The U.S. Treasury building in Washington, D.C., on Friday, March 19, 2021.

Samuel Corum | Bloomberg | Getty Images

Things are getting pretty bad for 30-year Treasury bonds, the prices for which are plumbing depths not seen since the early days of the Covid crisis.

Specifically, a popular ETF that tracks the long bond continues to see a price plunge that has carried it to a year-to-date slide of more than 18%.