The U.S. Treasury Bond Market is Crashing…Have You Noticed?

The U.S. Treasury BOND market is crashing..Have you noticed?

The extent of the carnage in the U.S Treasury bond market is jaw-dropping, and is not totally captured in the yields that are generally published in the financial media.  Bond yields move inversely to prices, of course,and the benchmark U.S Treasury yield of 2.76% this morning compares to 1.50% on December 31st,  2021.

That is an attention-grabber, but it doesn’t reveal the true damage to bondholders’ portfolios.  Also, note that the prices listed in tables produced by Boomberg and other sources are NOT proces of actual bonds. They are synthetic representations of how a bond with exactly the specified maturity (in this case 10 years) would be priced, based on prices of bonds with maturities near that round maturity.  

My background is in equities, and we are used to real-time prices for everything.  So, in lieu of a bond “index” that I went to the U.S Treasury’s website and picked a representative bond.  This is an actual US government issued security, not an index.

I chose the 10-year U.S Treasury note issued on 11/15/2021.  That security has since been “re-opened,” i.e. more were issued, two times since then. In the initial offering, which can be found here, the U.S Treasury accepted bids for $61.6 billion worth of bonds, $39.0 billion of which were competitively bid, and $22.6 billion form the SOMA, which is the New York Fed’s bond-buying account.  So, even though more than third of the bonds issued were sold to a separate branch of the U.S government, the total auction would have been considered a success, with a price of 99.359650 on the dollar and a median yield of 1.37% versus the coupon rate of 1.375%

Oh, how times have changed.

Fast forward until Friday–bond prices are posted at 1PM ET each working day, they will have surely fallen in this morning’s continued sell-off–that same issue (CUSIP 91282CDJ7) was trading at an “end of day”  price of 88.593750.

That is just extraordinary.  The capital loss on that security, in under 5 months of life, is currently 10.8%. Again, extraordinary.  I manage equity portfolios for private clients for my firm, Excelsior Capital Partners, and I can be assured that I will start receiving communications from them any time we see a decline of 5% or so in any security.  A nearly 11% decline in a BOND in not even 5 months is almost unfathomable.  That security’s coupon rate of 1.375% won’t “make up” that loss in even 7 years. 

So, this is the biggest problem facing the U.S EQUITY market now…the U.S. BOND market.  As the high-duration names in the Nasdaq are priced to reflect a greater discount on POTENTIAL future earnings from products that don’t yet exist–like self-driving cars, sentient robots or the Metaverse–that puts pressure on the ENTIRE U.S. stock market.

So, “hopium” names, like Tesla and Meta and so many others, are subject to a substantial downward re-rating, but it really hits most broad-based U.S. equity portfolios, as those Big Tech names are so strongly represented in the indices.

Further, U.S bond funds tend to be run with HEAVY leverage, as the yield on the benchmark Treasury has been trending downward for the past 40 years, and returns have to be generated somehow.  I fear that we are entering a time when margin calls will be issued.  I am watching Google for “bond fund failures.”  An 11% discount to a fund’s equity is VERY difficult to manage..so more funds wil sell more bonds, which will make prices decline even further…which increase the pressure on bond funds.  It is a vicious cycle, but not a new one.    

The U.S economy is already feeling the impacts of an ENORMOUS policy mistake by FOMC Chair Powell Treasury Secretary Yellen and their band of clueless co-conspirators at hte Treaysyr and Federal Reserve.  The ECB has been just a feckless.

Inflation is not transitory, and history shows that it NEVER was. Putin’s invasion of Ukraine has served to terribly exacerbate that dynamic, but it was not the original cause.  Free money was.  

The extraordinary increase in the Fed’s balance sheet (chart here) in the wake of the COVID crash has devalued interest-bearing assets to an extraordinary degree.  It took a year for that to be reflected in the official government figures, but that is a reflection on the Stone Age-era data collection techniques used to compile those figures, not the amount of inflation itself.

So, the U.S equity markets are rightfully concerned about another wave of horrible inflation figures this week, as CPI data for March will be reported Tuesday at 8:30 AM ET, and PPI on Wednesday at the same time.  But these same unelected, Ivory Tower technocrats will no doubt try to spin the data, by obfuscating the true costs (my favorite is the presentation of the figures “ex food and energy”…who doesn’t eat or use transportation and heat??) and by laying a Yellow Brick Road narrative of “this will all be over soon.”

It won’t be.  

The way to BENEFIT from inflation in your portfolio is to buy commodities directly, or commodity-linked stocks. Such stocks compose the model portfolios of my firm, Excelsior Capital Partners. HOAX is here and HOAX 2.0 is here. 

Please respond via OHM Research for more details on these portfolios.  Both are benchmarked against Big Tech-heavy competition (ARKK and QQQ, respectively.)   Rising interest rates are the enemy of those “hopium” filled portfolios. 

Don’t ignore the bond market.  Ever.