The bond-market sell-off that has been occurring recently is causing yields to soar and is starting to surpass some of the most extreme market meltdowns in history. According to Bloomberg, Treasury bonds with maturities of 10 years or more have experienced losses of 46% since March 2020, while the 30-year bond has plunged 53%.
These losses are comparable to the stock-market losses seen during major crashes like the dot-com bubble burst and the financial crisis of 2008. In both cases, equities slumped by around 49% and 57% respectively. However, the current bond-market meltdown is even more significant when compared to previous bond-market crashes. The losses are over twice as large as those seen in 1981 when 10-year yields neared 16%.
The 1981 crash occurred during a period of historic inflation and was driven by former Federal Reserve chair Paul Volcker’s efforts to combat inflation by increasing interest rates. Although interest rates today are much lower than they were in 1981, the recent aggressive turn towards monetary tightening by the central bank has led to a similar bond-market rout. Traders have been selling bonds due to concerns about rebounding inflation, while the large volume of Treasury issuance this year has also put pressure on bond prices.
As a result, the yields on long-duration bonds have reached their highest levels since 2007, with the 30-year note surpassing the 5% barrier for the first time in decades. Investors believe that the 10-year yield will follow a similar path and are predicting it to hover just above 4.7%. Prominent investors such as Bill Ackman, Ray Dalio, and Bill Gross even anticipate the 10-year yield reaching 5% in the near future.
Overall, the current bond-market sell-off is causing significant losses in Treasury bonds and is comparable to some of the worst market crashes in history. The combination of the Federal Reserve’s tightening policies, concerns about inflation, and increased Treasury issuance has led to a steep decline in bond prices. The impact of these market dynamics is likely to continue to be felt in the coming months as investors monitor the bond market’s response to changing economic conditions.