Bond Market Selloff: Time to Reevaluate Your Definition of 'Risk-Free' Investment
«Bonds are safe!»
How often do we hear this phrase?
Many believed that stuffing their portfolios with government bonds was the route to safety. The common wisdom was that even if the stock market took a nosedive, bonds would come to the rescue and stabilize the portfolio.
However, as we've come to see, this belief hasn't held up. It's important to remember the words of the wise Howard Marks: markets are like a pendulum, swinging between extremes, seldom resting around the mean.
After over a decade of basking in the low-yield, rising-price environment, bonds have had their rude awakening. Yields dipped into the negative, and prices soared, but the tide has turned for bonds as well.
Here's an intriguing chart, depicting the drawdown (that's a decline) of iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), compared with… Bitcoin.
A close look reveals that the scale of the decline has been strikingly similar in recent years:
What makes this bear market particularly intriguing is that the price plummet, unlike the subprime crisis, was not triggered by risk spread, but by duration risk, as illustrated in the image below:
Let's simplify this for those not well-versed in financial jargon: The recent crash in bond prices is entirely due to the extended duration of the bonds one selected.
If an investor bought bonds with longer maturities, they experienced a more severe hit.
The key question is, why would one make that choice?
Some might argue:
«In 2021, if I bought a government bond with a maturity of under five years, the yield was close to zero or slightly above. I had to opt for longer maturities out of necessity.»
However, did you carefully consider this risk? Did it not seem suspicious that bond prices (which move inversely
Read more on investing.com
