Extraordinary Gains in Long Treasuries

The extraordinary gains in long Treasuries so far this year is a sight to behold.


By James Picerno

In the rush to safety this year, US debt has been a clear winner and within this space long maturities have left the rest of the fixed-income realm in the dust, based on a set of exchange-traded funds through yesterday’s close (Apr. 14).

The iShares 20+ Year Treasury Bond (NYSEARCA:TLT) is up an astounding 21.5% so far this year. The gain has come with a surge of volatility, but for investors who’ve held tight the extreme ride has been dramatically successful so far.

The outsized gains, however, are a sign of the extreme risk-off sentiment that prevails around the world. The question that investors in long Treasuries should ask: Will the potent Treasury gains of 2020 reverse once the crowd decides that the worst of the coronavirus has passed? Probably, although predicting when that turning point arrives is subject to uncertainty in the extreme.

Joachim Fels, global economic advisor at PIMCO, a fixed-income money manager, considers what may be waiting on the other side of this year’s Treasury rally:

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Some observers argue that once the pandemic passes, record-wide fiscal deficits, concerns about debt sustainability, and higher inflation will push nominal and real interest rates back up to, and potentially even above, pre-pandemic levels. Others believe that a combination of a larger private sector saving glut and implicit or explicit nominal yield curve control by central banks will keep interest rates low long after the pandemic has passed.

Meanwhile, the near-term rear-view mirror has rarely looked so bullish for Treasury returns–across the maturity spectrum.

But not every corner of fixed income is celebrating. Notably, junk bonds are taking it on the chin year to date. The deepest loss for 2020 is currently posted by SPDR Bloomberg Barclays High Yield Bond ETF (NYSEARCA:JNK), which has shed 6.8% so far. That’s a deep cut, but the fund has rallied sharply in recent days and trimmed what had been a dramatic loss to a relatively modest setback.

The benchmark for US investment-grade debt is comfortably in positive terrain year to date. Vanguard Total Bond Market (NYSEARCA:BND) is up 4.7%.

Investment-grade corporates have had a rough ride this year amid growing concern that some formerly solidly-rated companies will suffer in the deep recession that’s been unleashed by the coronavirus lockdown. As a result, a portion of debt that was previously considered investment-grade is destined for a downgrade to junk status. But thanks to the Federal Reserve’s recently announced policy of support for corporate debt, BND has rebounded following a dramatic swoon in March.

Despite the rally, some analysts still see opportunity in credits. “If you look at the level of implied default in the investment-grade corporate bond market, even at today’s valuations, the spreads are way too wide given what we think will be actual defaults,” advises Mark Kiesel, chief investment officer for global credits at PIMCO.