Treasury yields are spiking to levels not seen in over 15 years, causing sell-offs in many of the market’s biggest bond funds. And some Wall Street strategists see further downside ahead. The iShares 20+ Year Treasury Bond ETF (TLT) closed at $89.18 on Monday, which was its lowest close since Feb. 10, 2011, according to FactSet. The fund is down more than 10% for the year on a price basis, and it has lost 8.5% on a total return basis. TLT mountain 2010-01-01 The TLT closed at its lowest level since 2011 on Monday. The TLT is not an outlier among major bond funds. Monday was the sixth-lowest close for the iShares Core U.S. Aggregate Bond ETF (AGG) since 2008. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) has held up relatively well this year, with a total return of about 1%, but it is still trading near its lowest levels since 2010. On the other hand, inverse bond funds have performed well even if investors have been reluctant to embrace them. The ProShares UltraShort 20+ Year Treasury ETF (TBT) has seen its share price rise by 19% this year. The fund moves coincide with the 10-year Treasury yield climbing above 4.5% and reaching its highest level since 2007. Bond prices — and the price of long bond funds like the TLT — move opposite of yields. US10Y YTD mountain The 10-year Treasury yield has reached new highs for the year in recent weeks. The Fed’s impact The latest leg higher in yields was spurred by the September Federal Reserve meeting . The central bank held rates steady, but dialed back projections for rate cuts in 2024. Those projections, combined with a surprisingly resilient U.S. economy that has fueled fears of sticky inflation, has opened the door for long-term yields to follow their short-term counterparts above 5%. “Reaching 5% levels for 10yT is likely to require not only a further upgrade to fundamentals (i.e., a shift in odds further to the right side of the distribution of outcomes – beyond soft landing which is still our baseline) but also a higher degree of conviction around the outlook,” Bank of America rates strategist Bruno Braizinha said in a note to clients Tuesday. One area of concern is that some economists think the “neutral rate of interest” has moved higher, which means that the Fed may need to leave rates elevated even if inflation returns to its 2% target. “We have seen indications of a c.50bp recent repricing of the neutral rate across a range of metrics. A further repricing beyond levels c.3-3.5% would drive a further pricing out of the ’24 and ’25 cuts, and potentially push 10yT to levels closer to 5%,” Braizinha added. The Fed’s target interest rate is already above 5%, as are short-term Treasury yields. Goldman Sachs strategist Cecilia Mariotti said in a note to clients on Monday that investors could expect long-term rates to continue to rise relative to short-term rates, which would flatten the inverted yield curve. “Front-end rates volatility has continued to reset relative to the back-end … but the ratio remains elevated vs. history. Our strategists like to trade a further reset in the US where there is relatively more certainty on the monetary policy stance,” Mariotti said. To be sure, not all professional strategists agree on this point. Barclays research chief Ajay Rajadhyaksha said in a note to clients on Monday that bond prices now appear fair and that there is room for “downside surprises” in the Fed’s outlook for economic growth. And BTIG chief market technician Jonathan Krinsky said in a Tuesday note that bonds are “working through a tactical bottom” and that the latest drop may prove to be a false move if the TLT can rebound to about $92 per share. A new era? The recent milestones for bond yields are reaching back to before the financial crisis, which saw the Federal Reserve cut rates to zero and leave them there for years. But the long-term decline in bond yields began roughly two decades before that. That trend may finally have reached its turning point, Jim Grant, founder of Grant’s Interest Rate Observer, said Tuesday on CNBC’s ” Squawk Box .” “Interest rates … tend to trend in generation-length phases or cycles. That’s been true since, in this country, after the Civil War. And I say we just ended … 40 years of persistently declining rates,” Grant said. The high interest rates appear to be taking a bite out of stocks in recent months, which changes the math on portfolio construction for investors who hope equities and fixed income can balance each other out. “While it is subtle, we continue to think the correlation is changing, and we will see rates down, stocks down as we move into Q4,” BTIG’s Krinsky said.
