A year ago, the yield on the 10-year Treasury note stood at 1.59%.
From that point yields fell, leading to big gains for Treasuries and other bonds. (The Shares 7-10 Year Treasury Bond ETF (IEF) gained 10.01% in 2020, for example.) Yields were down to 0.73% as of the week of April 15, 2020. And then hit their low for 2020 during the week of August 2 at 0.55%.
Since then the story for long Treasuries has been just the reverse. By October 4, the yields on 10-year Treasuries were back up to 0.78%. 0.83% by November 1. 0.93% on December 6.
And then 1.16% today February 9.
The forecast right now is that yields for long Treasuries aren’t done climbing either. The yield on the benchmark 10-year Treasury has the potential to climb as high as 1.9% by the end of 2021, Peter Tchir, head of macro strategy at Academy Securities, told Bloomberg. People still need to buy long Treasuries, Tchir notes. Pension funds and insurance companies need to buy them in order to match maturities with projected outflows, for example. But more and more people are underweight long-term Treasuries, Tchir says, or actually short these assets.
You can see the effects in the cash flow of funds and ETFs of things like the iShares 20+ Year Treasury Bond ETF (TLT). That ETF saw $639 million in withdrawals on Monday. That was the biggest outflow for the $15.7 billion ETF since the coronavirus bear market of March.
You should also note that, so far, we aren’t seeing a bond sell off across the yield curve. The yield on the 2-year Treasury is still stuck down at 0.13%.
That’s led to a much steeper yield curve and speculation that if the yield on the 10-, 20-, and 30-year Treasuries climbs much higher (with the drop in price for these maturities) that the Federal Reserve will have to implement some kind of curve management policy to prevent rising long-term yields from doing real damage to the economy. (The 10-year Treasury, for example, is the benchmark for rates in the mortgage market so higher 10-year yields on the bond turn into higher mortgage interest rates–and slower housing sales.)
The implications for your portfolio?
If you bought long-dated Treasuries to lower risk in your portfolio and to hedge against a drop in stock prices, you need to rethink those buys. If yields climb further, you’re looking at big losses in this hedge if you own those Treasuries through a mutual bond or an ETF. (As opposed to individual bonds that you can hold until they mature at face value.)
Roughly, a $1000 10-year Treasury at a yield of 1.16% will drop in price to $610 at a yield of 1.9%. You don’t want to be along for that ride. (And just for the record, my opinion for what its worth, is that the increase in yields won’t be this extreme by the end of 2021 since it’s based, in part, on what are likely to be overly optimistic projections of economic growth this year. I do, however, think that the direction for yields this year is definitely higher. Which puts the trend against bond holders, even if the damage to their portfolios isn’t going to be as bad as trends now suggest.)
Now the likelihood is that yields on long Treasuries won’t climb smoothly–there will be bumps and rallies along the way.
I can certainly imagine a short-lived bond rally or two if the current belief that inflation will creep back to near 2% by the end of 2021 looks, temporarily, too negative.
And higher yields on the long-end of the curve with the short-end of the curve anchored by the Fed’s current short-term benchmark interest rate of 0% to 0.25% means a steeper yield curve. Which would be good for bank stocks since banks borrow at the short end of the curve and lend at the long end.
My recommendation would be to sell long-maturity bond funds and ETFs that you hold to cut risk and diversify a portfolio.
So tomorrow, February 10, I’ll be selling the iShares 7-10 Year Treasury Bond ETF (IEF) out of my Jubak Picks Portfolio (with a gain of 4.18% plus dividends since August 14, 2019), and out of my Dividend Portfolio (with a gain of 6.50% since November 11, 2019), and out of my Volatility Portfolio (with a gain of 4.18% since August 14, 2019). That ETF is down 1.99% in the last three months.
That still leaves me with positions in the Vanguard Intermediate Term Treasury ETF (VGIT) in my Perfect 5 ETF Portfolio and in my Jubak Picks Portfolio. That ETF isn’t quite as long-dated as the Shares 7-10 ETF since its goal is to track Treasuries with maturities of 3 to 10 years. But it is still on the wrong side of the current trend. This ETF is down 0.65% in the last three months. (I need to do a little more research to find a replacement for this ETF in the Perfect 5 ETF Portfolio, which is the reason for the slight delay in selling.)
