The bond market has experienced significant upheaval due to the Federal Reserve’s decision to maintain higher interest rates for a longer period. This has led to a surge in yields across all maturity periods, with initially the 2-year yields being most affected. However, now the intense increase in Treasury yields is impacting longer-term maturities as well.
During the latest FOMC meeting, the Fed kept rates unchanged but indicated a preference for another rate hike in 2023 and reduced the rate-cut scenario for 2024. This has had a significant effect on the 10-year and 30-year Treasury yields, which reached their highest levels in over a decade and since February 2011, respectively.
Rising real rates influenced by the Fed’s policy stance are driving these substantial increases in long-term Treasury yields. This has wide-ranging consequences as it directly impacts various aspects of the real economy such as auto loans, credit cards, and mortgage rates. The cost of borrowing for consumers and businesses increases as yields rise, which could potentially lead to a slowdown in economic growth.
Long-term Treasury ETFs have been hit hard by these yield surges. The largest Treasury-related ETF, iShares 20+ Year Treasury Bond ETF, experienced a substantial decline, reaching its lowest level in over a decade. Similar declines have been observed in other longer-dated Treasury ETFs, including SPDR Portfolio Long-Term Treasury ETF and Vanguard Long-Term Treasury ETF.
Furthermore, ETFs like iShares 7-10 Year Treasury Bond ETF and iShares 10-20 Year Treasury Bond ETF have also experienced significant drops since their peaks in 2020.
Overall, this situation has prompted market strategists to advocate a defensive stance as the dynamics in the market continue to shift.
