We’re Starting To See The End Of The Duration Bear Market

Has The Cycle Turned?

Investing in long-term Treasuries has mostly been an exercise in futility over the past 3-4 years. With inflation taking off and the Fed scrambling to catch up to contain it, T-bonds lost roughly half of their value from peak to valley.

While it’s easy to refer to this period as simply a “bond bear market”, it was much more nuanced than that. If we think of a bear market as a set of conditions where riskier or lower quality assets perform worse, this was exactly the opposite.

In the 2nd half of 2022, investment-grade corporate bonds’ maximum drawdown of 25% was only around half that of long bonds. Junk bonds only fell 16% from top to bottom. That’s what happens when the Fed raises rates by more than 500 basis points while simultaneously seeing trillions of printed dollars flood the system. Duration gets hammered and poor credit qualities actually benefit.

That dynamic is still in place today. Credit spreads started expanding in the early stages of the Fed’s rate hiking cycle, but that soon turned around. Liquidity remained in the system, but the big recession that most investors had feared never came to fruition. GDP growth remained steadily positive and large-caps managed to return to double digit earnings growth (small-caps, of course, have been a different story). As soon as bond investors saw this, spreads contracted and they’re currently back to historic lows, even as the economy today is slowing and credit pressures keep growing.

Treasury bonds have still remained a tough trade in 2024, but we’ve seen things change in a major way in just the past week.