BM Pro Daily - Bonds Down 30%
U.S. 30-Year Treasury Yield Hits 3%
Today, the U.S. 30-year Treasury bond yield hit over 3% as the Treasury bond market across durations and broader credit markets continue selling off.
The rise in yields has resulted in much higher bond market volatility and significant drawdowns for investors. The iShares 20-year Treasury Bond ETF, TLT, which tracks an index of long duration maturities, is now down over 30% from the all-time high back in July 2020. The latest drawdown is the fastest deceleration across a 30-day percentage change since May 2009.
For context, bitcoin is only down roughly 39% from the all-time high. So much for long-dated U.S. Treasurys providing low volatility, portfolio hedging performance and “risk-free” rates.
It’s not just long-duration bonds drawing down either, but rather the entire bond market across durations and credit grades when looking at a basket of popular bond ETFs.
As yields rise and financial conditions tighten, we still expect the Federal Reserve to try and catch up aggressively this year and the equity drawdowns to worsen. The market thinks so too with the eurodollar futures implied federal funds rate now at 2.93% for the end of 2022 and 2.41% by the end of September (up from the 0.33% today in the target 0.25-0.50 range).
James Bullard, Federal Reserve Bank president of St. Louis, noted this week that
“3.5% is the minimum Fed Funds Rate needed” and that “We should try to get there by the end of the year.”
Although that’s just one Federal Open Market Committee (FOMC) members’ opinion, that would imply 50 basis points rate hikes for every meeting left this year. Using the Chicago Mercantile Exchange (CME) rate hike probability data, the market says there is no chance we will make it to 3.5% and is betting the most confidence on the 2.50%-2.75% range by the December 14 meeting at 43.96%.
It’s important to keep in mind the long-term outlook of the global economic system when evaluating the performance of bitcoin and debt securities. Post Great Recession, the world engorged in a historic debt binge while rates remained pinned at 0%, and the Fed’s balance sheet ballooned.
Because of the realities of a historic debt burden that worsened post COVID-19 economic lockdowns, followed by the historic stimulus that followed, debt as an asset class was a promise of return-free risk. Debt is not merely an agreement between borrower and lender, but in the global economy it underpins the entire financial system as a liquid asset class (the largest one at that).
Because of the reality of roughly $100 trillion worth of credit promising return-free risk (nevermind the assets that are priced off of the historically negative real rates: equities, real estate, etc.), our case has repeatedly been that the perfect asset in theory to hold at this stage of a long-term debt cycle is one with no counterparty risk and zero dilution risk.
Theory met reality with the advent of the Bitcoin network in 2009.
Now, as the entire investing world is working to figure out how to outpace the historic inflation regime we are faced with today, there stands bitcoin, which continues to look remarkably cheap against the market valuation of every other asset on the planet.