Long-duration Treasuries just endured a stretch of losses not seen since before World War II, and the wreckage has left a question hanging over every fixed-income portfolio: does historic pain signal the beginning of a historic opportunity?
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For years, bonds were treated as the portfolio ballast that investors could rely on when stocks stumbled. That assumption took a beating after 2020. The Federal Reserve’s near-zero interest rates and quantitative easing pushed long-term Treasury yields to historic lows, leaving investors with little income and plenty of duration risk. When inflation returned, the setup reversed.
The Fed began aggressively raising interest rates in 2022, and long-duration bond prices fell as yields climbed. Now, Bank of America’s latest data show just how unusual the damage has been: 15-year-plus U.S. Treasuries recently produced a roughly -2% annualized return over the previous 10 years, the worst reading in data going back to 1936.
How Treasuries Got Here
Bond prices and yields move in opposite directions. When yields rise, existing bonds paying lower coupons become less valuable.
That relationship became painful for investors who owned long-term Treasuries during the pandemic. Yields on long bonds fell toward 1% to 2% or lower, supported by Federal Reserve monetary policy and low inflation. They looked safe because the issuer was the U.S. government. But “safe” from default does not mean safe from falling prices.
Then, massive monetary stimulus, supply disruptions, and a reopening economy pushed inflation higher. The Fed responded with aggressive rate increases beginning in 2022. Higher yields translated into lower prices for existing long-duration bonds. The result was a rolling 10-year return that eventually slipped below zero.
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The Damage Was Unusually Harsh
Bank of America’s Global Investment Strategy, using Bloomberg data, shows the recent trough is only the second period since 1936 when 15-year-plus Treasuries generated negative 10-year annualized returns. The previous negative trough occurred around December 1959.
The contrast with other assets is telling. Over roughly the same recent 10-year period, U.S. stocks returned about 15% annually, while commodities returned about 11%.
The popular iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) also endured a deep drawdown. From its early-2020 peak, TLT fell over 26%. That is not what many investors expected from the conservative side of a portfolio.
Why This Could Be a Great Entry Point
Ironically, it is the losses themselves that are creating the opportunity. The same rising yields that crushed older Treasury holdings have improved the prospective returns available to new buyers. Investors purchasing long-duration Treasuries today aren’t locking in the 1%-plus yields available during the pandemic. They are starting with considerably higher yields, providing more income and a larger cushion if rates eventually decline. That’s the core of the investment thesis: negative long-run returns have historically marked attractive entry points.
No doubt, long Treasuries remain vulnerable if inflation accelerates again or interest rates rise further. A bond yielding more today can still lose money tomorrow if its yield rises enough. But investors don’t need rates to collapse for the thesis to work. Higher starting yields alone improve the income component of future returns.
Key Takeaway
In short, the sustained decline of long Treasuries represents a reset in the asset class. Smart investors shouldn’t assume long bonds are destined to repeat their strongest historical returns, but after the worst 10-year performance in data going back to the Great Depression, the risk-reward equation looks far more favorable than it did when yields were near 1%.
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