Safe bond funds suffered the most from the market sell-off. Here’s why.


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Treasuries are selling off, pushing yields sharply higher, and bond funds are feeling the pinch.

In particular, safe bond funds, those

the morning star

The “Intermediate Core” and “Core Plus” categories lost an average of 6.3% for the year to Tuesday, according to fund tracker data.

Riskier high-yield bond funds performed better, although investors typically buy core bond funds to protect against falling stock prices. Funds in Morningstar’s High Yield Bond category lost an average of 4.7%. It also means that high-yield bond funds have also slightly outperformed the S&P 500’s 5% year-to-date loss on Wednesday morning.

While it may seem counterintuitive, the disparity underscores a major risk for global markets today: Federal Reserve tightening and its effect on longer-duration or more interest-rate-sensitive bonds. Duration and maturity are related but not identical, so bonds with longer maturities have longer durations and suffer greater losses when the Fed raises rates.

This means that bonds from safer issuers, such as top-rated governments and corporations, are most at risk, in part because of their security. They can borrow for long periods at low yields, which means they suffer the greatest losses when interest rates rise. Riskier borrowers in the high yield market have higher coupons and shorter maturities, so they have shorter duration (and less interest rate sensitivity).

This dynamic was also reflected in the relative performance of the various bond market ETFs. This is why the

iShares 20+ Year Treasury Bond ETF

(ticker: TLT) is down nearly 13% since the start of the year, while the

iShares iBoxx $ Investment Grade Corporate Bond ETF

(LQD) is down 10% and the

iShares iBoxx $ High Yield Corporate Bond ETF

(HYG) is down about 5.9%

Another good example is the Austrian 100-year bond, issued in 2020 with a coupon of 0.85%. An investor who bought the bond on Dec. 31 would have lost about 25% so far this year, according to Bloomberg data. Even with the losses, it now yields 1.5%.

Treasuries look better, with the 30-year yielding more than 2.5%. And overall, safe bonds are paying more today than they have since 2019. So investors who didn’t fight the Fed – those who bought risky investments while central banks were easing and can buy bonds now that yields are higher – might win out after all.

Write to Alexandra Scaggs at [email protected]


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