Monday, 5 August 2013

The Recent Bond Market Selloff in Historical Perspective

By Tobias Adrian and Michael Fleming

Long-term Treasury yields have risen sharply in recent months. The yield on the most recently issued ten-year note, for example, rose from 1.63 percent on May 2 to 2.74 percent on July 5, reaching its highest level since July 2011. Increasing yields result in realized or mark-to-market losses for fixed-income investors. In this post, we put these losses in historical perspective and investigate whether the yield changes are better explained by expectations of higher short-term rates in the future or by investors demanding greater compensation for holding long-term Treasuries.

Increase in Yields = Decrease in Returns
As yields and prices move inversely, the recent sharp rise in yields has resulted in losses to the owners of Treasury securities. The chart below shows that returns based on the ten-year, zero-coupon yield were -9.8 percent for the two-month (forty-two-day) period ending July 5 (zero-coupon yields are from Gurkaynak, Sack, and Wright [2006]). The decline is large by historical standards, but somewhat smaller than that observed in two-month windows in 1994 (‑12.6 percent), 2003 (-14.4 percent), and other recent periods (for example, -10.3 percent in late 2010). 

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