Bond Market Weakness

Extracted Attributes

• Key Concern

  Exacerbated by poor Treasury Department auction

• Risk Factors

  Interest rate risk, inflation risk, liquidity risk, call risk, credit/default risk

• Primary Cause

  Passage of The Big Beautiful Bill

• Contributing Factor

  Abandonment of fiscal austerity principles

• Global Amplification

  Instability in Japan's bond market

• Projected Impact on Debt

  Adds trillions to US National Debt

• Market Reaction (Currency)

  Weakening dollar and foreign buyer's strike

• Historical Context (Investment-Grade)

  Worst market since 1976 (July 1, 2016 - Oct 31, 2023)

• Potential Monetary Policy Consequence

  Federal Reserve may raise interest rates

• Market Reaction (20-year bond auction)

  Investors sought higher-than-expected yield

• Historical Context (Intermediate Government)

  Worst market dating to 1926 (July 1, 2016 - Oct 31, 2023)

Timeline

• Beginning of a seven-year stretch that saw the worst investment-grade bond market since 1976 and the worst intermediate government bond market dating to 1926. (Source: Morningstar)

  2016-07-01

• Start of a period where the 10-year Treasury yield increased from 0.54%, leading to significant losses in the Morningstar US 10+ Year Treasury Bond Index. (Source: Morningstar)

  2020-03-10

• The Morningstar US Core Bond Index came close to a new low, and the 10-year Treasury yield reached 4.98%, contributing to a cumulative 47.61% loss in the Morningstar US 10+ Year Treasury Bond Index since March 2020. (Source: Morningstar)

  2023-10-19

• End of the seven-year stretch identified as the worst for investment-grade and intermediate government bond markets. (Source: Morningstar)

  2023-10-31

• Bond market rallied to close out the year, with the 10-year Treasury yield dropping by nearly 100 basis points. (Source: Morningstar)

  2023-12-31

• A poor 20-year bond auction was conducted by the US Treasury, showing unusually weak demand and investors seeking higher-than-expected yields. (Source: CNN)

  XXXX-XX-XX

• The House passed The Big Beautiful Bill, making TCJA tax cuts permanent and abandoning fiscal austerity principles, directly contributing to bond market anxiety. (Source: Related Documents)

  XXXX-XX-XX

Liberty bond

A liberty bond or liberty loan was a war bond that was sold in the United States to support the Allied cause in World War I. Subscribing to the bonds became a symbol of patriotic duty in the United States and introduced the idea of financial securities to many citizens for the first time.

Web Search Results

• Why the bond market is so worried about the 'Big, Beautiful Bill' - CNN

  The 20-year bond auction conducted by the US Treasury on Wednesday afternoon was unusually weak: Demand for the bonds was the lowest since February, according to the Treasury Department. Investors who bought the bonds sought a higher-than-expected yield — effectively saying they wanted to be paid more for taking on the risk of lending to Uncle Sam. [...] The bond market is already on edge. Bond prices have been falling in recent weeks, and yields have been rising for several reasons. Recession fears have been somewhat allayed after the Trump administration lowered tariffs on China significantly last week. Yet inflation remains a big concern as companies reporting earnings in recent days, including behemoths like Walmart, said they’ll be forced to raise prices because of tariffs. [...] “The most troubling part of the market reaction is that the dollar is weakening at the same time,” said George Saravelos, head of FX research at Deutsche Bank, in a note to investors. “To us this is a clear signal of a foreign buyer’s strike on US assets and the associated US fiscal risks we have been warning for some time. At the core of the problem is that foreign investors are simply no longer willing to finance US twin deficits at current level of prices.”

• The Bond Market Faces 4 Big Risks | Morningstar

  From this perspective, the more than seven-year stretch between July 1, 2016, and Oct. 31, 2023, was the worst investment-grade bond market since 1976 and the worst intermediate government bond market dating to 1926, when the Morningstar Ibbotson Stocks Bonds Bills Inflation (SBBI) return series begins. For every US dollar invested at the start of that period, core bond investors had only about 98 cents at the end; intermediate government bonds fared better but still fell short of even by a [...] Throughout most of 2023, the investment-grade bond market stood to lose about 6% if market yields were to rise 100 basis points, and the Morningstar US Core Bond Index came close to a new low on Oct. 19 that year. As it turns out, the bond market rallied to close out 2023 amid the 10-year Treasury yield’s nearly 100-basis-point drop. [...] In a very low interest-rate environment, modest coupons and long maturities amplify bond market volatility. The Morningstar US 10+ Year Treasury Bond Index’s cumulative 47.61% loss between March 10, 2020 and Oct. 19, 2023, when the 10-year Treasury yield increased to 4.98% from 0.54%, illustrated what Martin Leibowitz warned of many years prior: “When rates can only go up, and when the price sensitivity of any given cash flow is near its maximum, it’s a pretty toxic combination.”

• Investing | bond market outlook | Fidelity

  Credit or default risk -Investors need to be aware that all bonds have the risk of default. Investors should monitor current events, as well as the ratio of national debt to gross domestic product, Treasury yields, credit ratings, and the weaknesses of the dollar for signs that default risk may be rising. [...] In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused [...] High-yield/non-investment-grade bonds involve greater price volatility and risk of default than investment-grade bonds. Lower yields -Treasury securities typically pay less interest than other securities in exchange for lower default or credit risk. Interest rate risk - Treasuries are susceptible to fluctuations in interest rates, with the degree of volatility increasing with the amount of time until maturity. As rates rise, prices will typically decline.

• What trouble in the bond market means for your investments ... - PBS

  Problem was, bond rates were spiking. So today's bonds were losing money and thus losing value as collateral. Lenders told the hedge funds, we need more collateral. The hedge funds appear to have begun selling their bonds to come up with it. Douglas Dachille: It's a vicious cycle, because you lose money, you sell. As you sell, you lose more money. So you create this spiral of selling. Laura Veldkamp: And so what we see is a rapid unwinding. Paul Solman: [...] A bunch of financial institutions, like hedge funds, had used U.S. government bonds as collateral, meaning I will lend you some money, but if you don't repay me back, I'm going to get those bonds that you have, because they're sure that those bonds will still have a lot of value in case you need to collect that collateral tomorrow. Paul Solman: [...] Well, the risk of flatlining seems especially remote now that tariffs with China have been paused. And yet bond yields have risen again. So, even though hedge funds don't seem yippy, and today's inflation number at least was unexpectedly low, investors just aren't loving our bonds. Expecting future inflation maybe? A Fed that won't lower rates? Whatever the reason, it will have knock-on effects for most of us. Laura Veldkamp:

• Three Warning Signs from Bond Markets | Morgan Stanley

  value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. [...] Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in [...] relatively unstable governments and less established markets and economies.