Bond markets have ‘never been so sensitive’ to a Treasury yield surge


The sharp rise in long-term bond yields since January has sparked jitters on Wall Street, as fixed-income markets increasingly become vulnerable to a surge in interest rates.

“We’ve never been so sensitive to changes in long term interest rates than we are now,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, in a Tuesday note.

Pensioners, insurance firms and investors have seen their bond portfolios gain in maturity over time, as more companies issue longer-dated debt to take advantage of the low interest-rate environment.

Boockvar noted that the average weighted maturity, or duration, of a basket of highly rated corporate bonds was at 8.3 years, up from 6.5 years a decade ago, based on data from ICE Data Services.

Though longer-dated bonds are more vulnerable to the risk of higher rates, the challenges of finding income in a world of low to near zero interest rates have made investors more than willing to overlook those concerns, Boockvar said.

While some investors have looked to earn incrementally richer yields through longer-dated maturity bonds, others have sought to scoop up debt issued by corporations with weaker balance sheets and higher borrowing costs.

Read: Investors scrape bottom of barrel in U.S. junk bond market

But in their search for income, investors also are set to take painful losses if long-term bond yields move much higher from here.

Simply put, a one percentage point increase in bond yields can lead to a 10% drop in the value of a bond with a duration of 10 years.

The sharp rise in Treasury yields this year already prevented some longer-dated corporate bonds from sharing in the broader gains from rising reflation hopes.

The 10-year Treasury note yield
TMUBMUSD10Y,
1.286%

is up around 38 basis points since the start of the year, trading at 1.29% at last check, according to Dow Jones Market Data. Bond prices move in the opposite direction of yields.

As a result, the iShares iBoxx $ Investment-grade corporate bond exchange-traded fund
LQD,
-0.61%

was down 2.5% in 2021 so far, albeit after a banner year in 2020.

And the iShares 20+ Year Treasury Bond exchange-traded fund
TLT,
-1.38%
,
which tracks the performance of longer-dated U.S. government bonds, is down over 8%.



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