Over the last month, the yield on 10 year US Treasury has risen from 2.02% to 2.53%, or roughly 25%. The rise in rates has not been triggered by any particular incident,but a general sense that the US Federal Reserve will need to start cutting back on its easy money policy during the next 6 to 18 months. When rates rise, bond prices fall. However, not all bond prices were equally impacted by a rise in Treasury Yields. Some types of bonds were hurt much worse that Treasury bonds.
How bad did Treasury bonds do?
The shorter the maturity, the less hurt one gets when interest rates rise.
Long-term treasury bond funds got destroyed. For example TLT, the ETF which holds treasury bonds with maturities between 20 and 30 years, lost 7.4% of its value during the month.
Intermediate treasury bond funds did badly, For example IEI, the ETF which holds treasury bonds with maturities between 3 and 7 years, lost 2.32% of its value during the month.
Losses for shorter-term treasury bonds were very small. For example SHY, which holds treasury bonds with maturities between 1 and 3 years, only lost 0.28%
Municipal Bonds Did Even Worse Than Treasuries
Yields On Municipal Bonds Rose Almost Twice As Much
Municipal bonds and bond funds got destroyed! They are calling it the Muni Meltdown. While the yield on the 10 year treasury rose 0.51%, the yield on 10 year Municipal bonds rose 0.97% to 2.86% according to Bloomberg. The leading municipal bond ETF, MUB, was down 6.9% over the last month.
Why would Munis do worse than Treasuries? Treasuries are generally held by institutional investors, while municipal bonds are mostly in the hands of individuals. The common thinking is that individual investors tend to buy when the market is rising and sell when the market is falling. When bonds started doing badly, individual investors may have had a strong reaction.
Corporate Bonds Did Worse Than Treasuries
The leading corporate bond ETF, LQD, was down 6.11%. Corporate bonds are less liquid than treasuries. When the market gets jittery, the preference is to be in assets which you can quickly sell. When things start to go badly, investors tend to sell assets that they think might be hard to find buyers for in a downward moving market.
TIPS Did Worse Than Treasuries
The yield on 10 year TIPS rose 0.83%, about .3% more than treasuries. The TIPS ETF (TIP) was down 6.52% over the month. While the market believes that a change in the FED’s monetary policy is in the near future, there is not a feeling that inflation is on the horizon. A rising rate environment makes inflation even less likely.
Conclusion – The Rise In Interest Rates Is Even Greater Than The Rise In The 10 Year Treasury Indicates. Corporate Bonds, Municipal Bonds and TIPS did much worse than Treasuries in terms of price drops during the last month.