Historically Brutal! US Long Bond ETF Approaching Halving

After the Federal Reserve unleashed the "longer-term high interest rate" curse, US Treasury bonds collectively plummeted, and the largest long-term bond ETF in the United States experienced its largest drawdown on record.

According to data collected by Bloomberg, the iShares 20+ Year Treasury Bond ETF, valued at $39 billion, has fallen 48% from its historical high in 2020 and is currently at its lowest point since 2011. At the same time, data from IHS Markit shows an increase in short positions on the fund, with short interest reaching its highest level in about a month.

In response to this, Todd Sohn, an ETF and technical strategist at research firm Strategas Securities, said:

All of this is related to interest rate expectations - inflation has caused interest rates to rise significantly, and stronger-than-expected economic performance means that rates will continue to rise.

There is also the possibility of further rate hikes, which would be detrimental to any duration assets.

For the past few months, investors have been adjusting to the reality conveyed by the Federal Reserve: that interest rates will remain at higher levels for a longer period of time.

Last week, the Federal Reserve reiterated that given the resilience of the US economy, interest rates will remain high next year. The dot plot shows that out of the 19 officials, 12 expect further rate hikes this year, with fewer rate cuts expected than previously anticipated.

In this environment, long-term US Treasury yields have collectively surged. On Monday, the 30-year Treasury yield rose by 12 basis points to 4.64%, reaching its highest level since April 2011.

Zachary Griffiths, a fixed income strategist at Credit Sights, believes that the significant increase in long-term Treasury yields can be traced back to early August. At that time, Fitch Ratings downgraded the US credit rating, and the Bank of Japan unexpectedly made minor adjustments to its YCC policy, leading to a sharp rise in long-term Treasury yields under multiple influences.

Griffiths stated:

Recently, we believe that additional selling pressure came from the FOMC's September rate decision, in which policymakers indicated that they expect higher economic growth in 2023 (June SEP was 2.1%, while June was 1.0%), and rates will remain at higher levels for a longer period of time. This move has driven up yields across the entire curve, not just at the front end, and the interest rate market expects a reduction in the number of rate cuts in the coming years.

Against the backdrop of high interest rates, the iShares 20+ Year Treasury Bond ETF has fallen by about 10% year-to-date, 33% last year, and 6% the year before. Other long-duration funds have also suffered heavy losses, with the Vanguard Extended Duration Treasury ETF falling 14% year-to-date and the PIMCO 25+ Year Zero Coupon US Treasury Index falling over 15%. **

Looking ahead, Jonathan Krinsky, Chief Market Technician at BTIG, wrote in a memo last week:

The bond trend remains firmly downward, and to some extent, we continue to anticipate a shift towards lower long-term rates as the impact of 'higher rates in the longer term' on the economy unfolds. At that time, we expect a decline in rates to be accompanied by a decline in the stock market, although we haven't seen much of this scenario in the past year.