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The 30-year bond, one of the safest securities the Treasury market has to offer, is getting crushed via a selloff over the past two weeks that’s drawn comparisons to the losses seen in U.S. equities during the dot-com bust and the 2007-2009 financial crisis.
Long bonds issued in May and August of 2020, which mature in 2050, traded at 45 cents and 47 cents on the dollar as of late Thursday afternoon. The Federal Reserve is their biggest holder, with 18.8% of all the outstanding 30-year bonds issued on May 15, 2020, and 24% of those issued in mid-August of the same year, according to Bloomberg data. The Vanguard Group and BlackRock Inc.
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rank as either the second- or third-biggest holders of each of those securities.
Investors have been selling off the long-dated 30-year bond for a number of reasons. They include concerns about the growing U.S. budget deficit and the need for an increased supply of government debt, dysfunction in Congress, and the Fed’s fight against inflation. The value of the 30-year bond issued in 2020 has tumbled 53% to 55% — putting the declines on par with the slumps seen in the S&P 500
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during the 2007-2009 crisis and the bursting of the Internet bubble at the start of this century.
Like other central banks, the Fed, with an $8 trillion balance sheet, can absorb day-to-day losses on various maturities and ride out market moves without being forced to sell. The central bank has stepped away from the Treasury market as a major buyer and is allowing its existing holdings of Treasurys to roll off as they mature — a process known as quantitative tightening, which some say has contributed to the recent climb in long-term yields.
“The Fed can have losses on its balance sheet and continue to have normal operations,” said Ben Emons, a senior portfolio manager and head of fixed income at NewEdge Wealth in New York. “It doesn’t mean anything because the Fed is indemnified by the Treasury so there are no major consequences from such losses and it won’t affect QT, that’s for sure.”
The central bank has “the ability to hold until maturity and the only thing that could change this would be if inflation becomes very, very problematic and maybe leads to another wave of trying to control the situation and expectations” — prompting bond sales similar to what the Bank of England is doing now, Emons said via phone on Thursday.
Similarly, active or passive bond managers, which routinely manage their risks, can have losses on their holdings and that “won’t stop them from functioning,” Emons said. “They just have fewer dollars in a particular Treasury fund and have to deal with the possibility of client outflows.”
In an email to MarketWatch, Samuel Martinez, Vanguard’s head of index fixed income product, said that the company’s holdings of long-dated Treasury securities on behalf of clients “are in funds where holding such securities is consistent with the mandate and associated benchmarks. We maintain rigorous oversight via our dedicated, independent risk managers.”
While the post-pandemic period has ushered in a period of inflation and higher rates — producing lower prices on existing Treasury bonds — “it has also provided a potential opportunity to invest in Treasuries with much more attractive return potential,” Martinez said. “For an investor focused on optimizing their asset allocation consistent with their investment objectives and risk tolerance, the sell-off in rates isn’t as detrimental as a superficial perspective might suggest and may even be an attractive opportunity to align their portfolio with their long-term allocation targets.”
New York-based BlackRock, the world’s largest asset manager with $9.4 trillion under management as of June, declined to comment through a spokeswoman. The Fed didn’t immediately respond to requests for comment on Thursday.
As of Sept. 27, the Fed owned 18.8% of all the outstanding 30-year bonds issued on May 15, 2020, with a coupon of 1.25%, and which traded at 45 cents on the dollar Thursday, based on Bloomberg data. The next biggest holders were Vanguard, which held almost 3%, and BlackRock, which held around 1.8%.
The Fed is also by far the largest holder of the 30-year bond issued in mid-August of 2020 with a coupon of 1.38%. The central bank holds 24% of that security, which is currently trading at 47 cents on the dollar — followed by BlackRock with almost 2.7%, and Vanguard at 2.6%, according to Bloomberg.
On Thursday, the 30-year rate
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continued to push toward 5%, the highest level in 16 years, after having jumped more than a full percentage point from its April low of 3.538%. In just the past two weeks alone since the Fed reiterated a higher-for-longer mantra in rates at its Sept. 19-20 meeting, the yield has jumped more than 30 basis points — burning existing bondholders.
Back in May and August of 2020, the 30-year yield was below 1.5%.
“It’s well-known that a lot of the paper the Fed owns is underwater,” said Gregory Faranello, head of U.S. rates for AmeriVet Securities in New York. “But for the central bank, it’s not going to make any bit of difference because it is more than likely going to hold to maturity.”
“Although the notion of the Fed selling assets has been discussed, we view [it] as unlikely,” Faranello said. “For other market participants, it may matter. But it will depend on whether they have to mark-to-market or not and potentially ‘need’ to sell assets.”
