- The bond market has crashed horrifically
- The consequences are barely making themselves felt
- A reminder that investment mantras are eventually disproven
If the bond market crashed and nobody noticed, has it crashed at all? Well, we’re about to find out, because you’ve just lived through a record-breaking bond market rout… but it’s not exactly on the news.
Bank of America researcher Michael Hartnett did the maths and calculated that, since the peak in July 2020 and the subsequent 28-month drop of a record 25%, this is now the single greatest bond bear market of all time for the US… well, going back more than 230 years.
However, 25% doesn’t quite cut the mustard cleanly because there’s a lot of debt around these days, which means greater losses in value terms. Deutsche Bank came up with a $70 trillion loss, just waiting to be realised.
The crash wasn’t just the biggest, but the fastest on record, once you take a more international outlook and include other governments’ bonds’ similar fates.
It’s worth remembering that the losses are concentrated within certain parts of the bond market, namely longer-term bonds. Austria issued a 100-year bond for a yield of less than 1% in 2020. The investors who bought the bond at its peak are now down more than 74%! The long-duration US Treasury bond exchange-traded fund (ETF) “TLT” is down about as much as stocks during the height of the 2008 financial crisis.
All this is in the risk-free asset of the financial system – government debt.
As the historian Niall Ferguson put it on Bloomberg, “Nobody could have predicted the Treasury market’s collapse of the last two years — apart from every critic of artificially low interest rates since John Locke.” Locke having been around since the 17th century…
Indeed, we warned repeatedly in Fortune & Freedom about bonds’ poor prospects in 2021. But the speed, severity and extent of the crash have surprised even us.
What’s remarkable about the crash is not the correction, but the absurdity that preceded it. It’s not about how much bond prices have fallen, but how far they rose first.
Perhaps that’s why the bond market isn’t getting the news its cousin, the stock market, does when it crashes. What we’ve seen isn’t just a crash, but a return to more normal levels in bond yields.
Of course, the silent and ignored bond market crash hasn’t left us unscathed – we are feeling its consequences all around us. It unseated a government in the UK (but not in the US), brought down a bunch of banks in the US, and the lost capital is so large that even some parts of the mainstream media have picked up on it. Here’s the Telegraph:
A global rout in bond markets has unleashed chaos on British savers’ pension pots, forcing thousands to choose between delaying retirement or crystallising huge losses in their lifetime savings.
However, if we compare the coverage today to what occurred during the stock market crashes of 2000 and 2008, there hasn’t been a peep. Despite the fact that the bond market is far more important to our everyday lives than the stock market.
The second-order effects are making themselves felt too, with interest as a percent of government expenditures set to spike to dangerous levels across much of the developed world in the coming years and ever more mortgage borrowers ticking over into dangerous interest rates.
But what remains most remarkable about the bond market carnage is not what has gone wrong, but what hasn’t. If you had asked me a year or two ago what would happen if interest rates, both at central banks and in bond markets, had hit current highs, I would’ve responded that it’s nigh on impossible. Something would’ve gone disastrously wrong long before rates reached this high, necessitating interest rate cuts and a flight back into bonds. Instead, the bond bear market has extended beyond even what those warning about bond prices warned about in 2021.
Perhaps the reckoning is yet to come as bond yields make themselves felt in the rest of the economy via mortgage rates, government interest expenses and more. If so, we can expect a record economic crunch to match the record bond market crash.
All of this is a reminder that set-and-forget investment strategies are downright dangerous. Whether it’s “stocks go up in the long run” or having an ever-growing proportion of your assets invested in bonds as you grow older to supposedly reduce your risk, the great investment mantras of the day always lead investors into dangerous neighbourhoods eventually.
In the past, such misguided mantras included the idea that stocks should yield more than bonds by paying high dividends. They’re much riskier, after all. But this thinking would’ve led you to miss the great bull markets of the last century as the ability of stocks to deliver capital gains took over.
Just imagine what investors who are nearing retirement must be feeling today. Their advisers told them to hold lots of stocks going into the 2008 crash and then lots of bonds as they grew older and neared retirement, only for the bond crashes of 2022 and 2023 to lose them money…
Until next time,
Editor, Fortune & Freedom