Prior to 2020, the worst selloff on record in long-term Treasury bonds was a decline of 21% 1, which occurred as interest rates spiked in the late 1970s. This period of market history has been seared into the memories of investors as a warning that risk is present, even in the normally uneventful world of fixed income investing. For decades, investors always pointed back to the 1970s as the worst period to be a bond investor, and protected themselves against the risk that such a scenario could repeat.

Over time those memories faded, and in the decade that followed the global financial crisis, bond investors’ patience was tested. With inflation and interest rates near zero, the returns on ordinary safe fixed income were low, with little prospect for higher returns in the foreseeable future. Investors and advisors steadily threw in the towel, opting to increase the risk in their fixed income portfolios by purchasing longer term bonds that offered “attractive yields” of 1-2%, or took on even more risk by investing in speculative corporate bonds or the debt of foreign countries with spotty track records of repaying debt. In perhaps the climax of this unique period of market history, Argentina, a country known for consistently failing to repay its debts, capitalized on this demand and issued a 100-year bond2, which was quickly purchased by risk-seeking investors.

The history books have been completely rewritten by what has unfolded in the past four years. From August 2020 to October 2023, long-term Treasury bond investors lost 46% of their principal.3 Their losses have been more than twice as large as the previous record set in the 1970s. For perspective, the selloff in U.S. equity markets was 45% in the dot-com bubble of the early 2000s, and 50% in the depths of the global financial crisis in 2008-094 , so these bond investors have experienced losses akin to some of the worst selloffs in stock market history. To add insult to injury, long-term bond investors who had hoped the worst was behind us have sustained another 6.5% loss through May this year.5 And, to the complete shock of many investors, Argentina has already defaulted on its century bonds, settling with investors in court to pay 54 cents on the dollar.6

We are living through the worst bond market selloff in the past 100 years.

Fortunately, clients of CCM have largely avoided this entire episode. Our fixed income strategy is designed to prioritize investing in short-term treasury bonds and high quality corporate bonds. While our strategy can allow our clients to invest in longer term bonds, it will only do so when the yields on those long-term bonds are sufficiently attractive relative to short-term bonds. In recent years, we’ve been in an environment where the additional return offered by long-term bonds has not met this criteria, and at times these long-term bonds have even offered lower yields, a market condition known as an "inverted yield curve." As a result, our clients have largely owned short-term high quality bonds, and where available, we’ve taken advantage of employer retirement plans that offer stable value options that have paid attractive yields.

Our Interdisciplinary Team Helps Clients Accomplish Their Goals

While we’d like to take a bow and credit our ability to predict the future and sidestep every crisis, the reality is that this performance is the result of our client-focused, integrated wealth management team structure. Our investment team doesn’t operate in a silo; they are members of an interdisciplinary team that has a collective focus on helping our clients to accomplish their financial goals. This focus is unique, and keeps our decision-making centered on the client and their financial plan. It’s this focus that helps us retain the appropriate perspective on how to invest in the bond market, knowing that this segment of the portfolio is meant to reduce risk and enable favorable rebalancing opportunities when negative volatility emerges in the stock market.   

Consider, for example, that in the stock market selloff of 2022, the U.S. stock market was down 25% from January to September of that year. During that time period, long-term Treasury bonds were down 26%.7 It’s difficult to create favorable rebalancing opportunities when your fixed income investments are declining as fast as your stock investments. Short-term fixed income retained far more of its value during this time period, allowing our team to capitalize on substantial opportunities to rebalance portfolios and purchase equities at market lows, ahead of the subsequent rebound that would occur in 2023.

We’re Proactively Monitoring 

Yields today are higher, and prospects for future returns in fixed income are far more favorable today than they’ve been at any point in the past 15 years. And yet, our method of gauging risk in the bond market continues to guide us to exclusively owning short-term and safe fixed income in our clients’ portfolios. With yields above 5%,8 our clients today face an investment environment where future returns should be far more favorable, and we’ll continue to proactively monitor markets to determine when any changes should be made. But more importantly, our commitment to our clients is that we will continue to operate within our integrated wealth management framework, which aligns our decision making with our clients’ financial goals, allowing for superior outcomes to be achieved.

  1. Dimensional Returns Program, Long-Term Government Bond Index 1/1926-12/2019
  2. CNBC, "Argentina sees strong demand for surprise 100-year bond." 5/20/2017
  3. Morningstar. Vanguard Long-Term Treasury Idx Admiral (VLGSX). Total return 8/7/2020-10/19/2023 = -46.07% .
  4. Dimensional Returns Program, CRSP Deciles 1-10 Index 1/1926-4/2024
  5. Morningstar. Vanguard Long-Term Treasury Idx Admiral (VLGSX). Total return 1/1/2024-5/31/2024 = -6.53%
  6. Reuters, “Argentina’s old bonds wave goodbye as focus turns to new debt”. 9/4/2020
  7. Dimensional Returns Program, Long-Term Government Bond Index & CRSP Deciles 1-10 Index. 1/2022-9/2022
  8. Federal Reserve Bank of New York

NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.

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