The Mounting Losses in Bond Long-Term Funds, Adding Injury on Top of Injury

The US Treasury 30-year bond, the so-called Long Bond, is proving to be a widow-maker to those who bought a couple of months ago. Most investors did not want to hear that a mere 1% rise in interest rates across the board could wipe out 15% or more of the face value of their investment. After all, you never lose a cent if you don’t sell a government bond. For those who are in long-term bond funds, they are not going to be happy when they see their fund values because long-term interest rates have risen 70 basis points in less than two-months. We cannot say that this is insult on top of injury. After all, we have been warning readers not to be “bond complacent” since December.

On May 2, the yield on the 30-year Treasury was 2.82%. On Thursday June 20 it is 3.52%. The ProShares UltraShort 20+ Year Treasury (NYSE: TBT) exchange-traded product hit a new 52-week high of $73.99 as it is double-short the Long-Term Treasury market. This has risen literally 25% since the start of May.

Now to show just how bad the losses are in long bonds… The iShares Barclays 20+ Year Treasury Bond (NYSE: TLT) exchange-traded product is down right at $110 from its 52-week high of $132.21, for a loss of almost 17%.

The carnage is being felt in emerging market bonds as well. The iShares JPMorgan USD Emerging Markets Bond (NYSE: EMB) exchange-traded product is down over 3.5% at $106.40 today alone. That is down by 14.5% from its 52-week high of $124.43.

No one wanted to believe that the value of bonds was ever going to crater, and no one wanted to believe that when interest rates start to really rise they would be like a horse that broke free from a carriage. Sadly, the people wasting time checking what their buddies are doing on Facebook won’t understand that this is real.

If you want a lesson about how far and fast rates can rise, this feels like 1994 all over again. The difference is that long-term interest rates were much higher then and the long bond rate went from roughly 6.25% up to 8% in that year.

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