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Losses in long-maturity bonds are nearing historical levels after coming under severe pressure due to record-high interest rates. The 10-year bond nosedived 46% since peaking in March 2020, a dip comparable to the 2000 dot-com bubble bust. 

Banks and Hedge Funds Feeling the Pain of Bond Rout

The declines in Treasury bonds with longer maturity dates continue to deepen, coming close to levels seen in some of the worst market crashes on record. 

Notably, bonds set to mature in 10 years or more plummeted 46% since reaching their peak amid the coronavirus outbreak in March 2020, Bloomberg data shows. A decline of such margin is close to the one registered in 2000 during the dot-com bubble burst. 

Similarly, 30-year bonds have plunged as much as 53%. Equities crashed 57% during the 2007-2009 financial crisis.

It is important to note that a slump in Treasury bonds with longer maturity dates can have a cascading effect on global markets. This is primarily because their yields rise when longer-term Treasury bond prices fall. This can serve as a benchmark for other interest rates, leading to higher economic borrowing costs.

One sector that can come under particular pressure is banking because lenders and hedge funds rely on low-cost borrowing to fund their operations. But as borrowing costs mount, banks and other financial institutions can face a slump in profitability and potential margin calls. 

Fed Going Hawkish in 2022 Changed Everything

The current losses in long-maturity debt have exceeded the previous largest slump in 1981, when the Federal Reserve’s efforts to combat inflation propelled 10-year yields to nearly 16%. These losses also surpass the average decline of 39% seen in seven US equity bear markets since 1970, including the 25% drop in the S&P 500 last year when the Fed began raising interest rates from near-zero levels.

And it seems like history is repeating itself. Longer-dated bonds have appealed to investors as the Fed spent several years cutting borrowing costs to zero for the past decade. However, as inflation pressures escalated last year and central banks were forced to turn hawkish, the market circumstances changed abruptly.

Further, it could be a while before we see a bottom in bonds. Hedge fund manager Harris Kupperman believes there will be no bottom as long as 10-year Treasury bonds remain inverted relative to short-term bonds, adding there is no reason the yield can’t go as high as 6% and even overshoot that level. The yield on the 10-year Treasury currently sits at 4.7%, the highest since 2007. 

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