Financial Planning Fridays #62: The New Bond Market Crash

There is currently a major market crash underway. This specific area of the market is down more than 40% since December 2021 and you may not even realize it. And we’re not referencing any area of the stock market.

We’re talking about bonds. Specifically, bonds maturing in 20 years or more.

What’s perhaps most shocking about this is how little attention this massive crash has garnered. This has, at times, rivaled some of the worst stock market crashes in history, including the Global Financial Crisis.

Traditionally, U.S. Government bonds are viewed as a safe haven by investors. A place where they can store money to protect their principal investments while earning a bit of income.

However, as this crash has shown, it is not always as simple as one may think. With a closer look at the performance of the 20+ Year Treasury Bond ETF, TLT, we can see that it is down more than 41% over the last 22 months.

Again, these are US Government bonds down 41% in less than a 2-year period.

This is a stark reminder as to the possibility of volatility in the bond market, something too many investors never consider, finding themselves unwittingly exposed to massive downturns right when they may need the income the most.

The cause behind this crash is not a lack of faith in the US Government, or a fear that they will be unable to repay their debts, but something that is more closely related to the length of time until these bonds mature, providing the investor with their original investment back.

Essentially, anyone who had invested in these bonds over the last few years likely locked in a rate as low as 1% after the Federal Reserve dropped rates dramatically to help weather the Covid crisis.

Once they began to rapidly increase rates instead, there were large numbers of investors left holding 10-, 20-, and 30-year bonds paying next to nothing in interest, when you could now receive a far better interest rate in the current environment, one closer to 5%.

This caused the older bonds to drastically plummet in value, leaving investors with a massive loss in the “safe” portion of their investment portfolio.

Fortunately, at Presilium, we have preferred short-term bonds, those bonds that most often mature in 2 years or less. This allows us to limit volatility as rates move up and down, and which in turn gives us the flexibility to purchase additional stock as part of rebalancing when we have good opportunities.

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.