The past two years have proven to be tumultuous for investors in US Treasury bonds, with 2022 marking the worst year for such investors since 1788 by one measure. Bond prices have been on a downward trajectory, and 2023 threatens to continue this trend, potentially leading to the first three-year consecutive decline in US bond history. However, amidst these challenges, the “smart money” is making a comeback.
One of the primary factors driving the return of the “smart money” to the US Treasury bond market is the appealing yields that have emerged. With interest rates on 10-year Treasuries hovering around 5%, which is more than triple the levels of just two years ago, investors are finding the current yields attractive. The key question is whether the fundamental factors influencing these yields have undergone significant changes. If not, there is potential for interest rates to decline once again, leading to a recovery in bond prices now that the inflation concerns have subsided.
The recent 30-year treasury auction in the United States garnered significant attention, and unfortunately, the outcome was far from favorable. This time, the bad auction received the expected reaction, resulting in a sharp selloff in US Treasuries, particularly in the 20 and 30-year papers. The US 30-year yield surged by 22 basis points, the 20-year yield jumped by more than 20 basis points, and the 10-year yield increased by 18 basis points, surpassing the 4.60% mark.
Adding to the challenges, Federal Reserve (Fed) Chair Jerome Powell’s speech at an IMF event further exacerbated the situation. Powell adopted a hawkish stance, emphasizing that the Federal Open Market Committee (FOMC) would proceed “carefully” and that the Fed would not hesitate to raise interest rates if deemed necessary. This declaration pushed the US 2-year yield back above the 5% level, intensifying the apprehension in the bond market.
The surge in Treasury yields in recent months has had a palpable impact on investors’ risk appetite and has cast a shadow over the stock market. These rising yields have contributed to tighter financial conditions, increasing the cost of borrowing for companies. As a result, investors have been navigating a challenging landscape as they grapple with the implications of higher interest rates on various asset classes.
Despite the recent setbacks in the bond market, some investors are viewing the current environment as an opportunity. The attractive yields on offer are enticing those with a strategic perspective. However, it’s essential to recognize that investing in US Treasury bonds is not without risks, especially in a rising interest rate environment.
The “smart money” reentering the US Treasury bond market reflects a belief that the recent surge in yields may have been an overreaction to inflation fears. If inflationary pressures subside or are more transitory than expected, there could be room for yields to retreat, bolstering bond prices.
It’s worth noting that the return of the “smart money” should not be seen as an unequivocal endorsement of the current state of the bond market. Investors are urged to exercise caution, conduct thorough research, and consider their risk tolerance when navigating the dynamic landscape of US Treasury bonds.
In conclusion, the last two years have posed significant challenges for US Treasury bond investors, with rising yields and inflation concerns weighing heavily on the market. However, the recent return of the “smart money” suggests that some investors are finding value in the attractive yields currently available. While the road ahead remains uncertain, the bond market continues to evolve, offering opportunities and risks that demand careful consideration and strategic planning from investors.
