Some Sovereign Funds are Uncomfortable Holding Long Duration Treasury Bonds
Posted on 04/01/2021
Treasury bonds smacked institutional investors hard in the first quarter of 2021. The total return of the 30-year Treasury bond was a -15.66% return in the first quarter of 2020. This was the worst performance for the bond on record for data going back to 1976. Low coupons and lengthy durations were factors in bad returns for bonds in the first quarter.
Investors are painfully learning what convexity means. Convexity is a measure of the curvature in the relationship between bond prices and bond yields. Convexity demonstrates how the duration of a bond changes as the interest rate changes. In addition, generally, bonds with long maturities and low coupons have the longest durations.
Quarterly 30-Year Treasury Bond Worst Returns
March 31, 2021: -15.66%
December 31, 2016: -13.72%
March 31, 1980: -13.49%
March 31, 2009: -13.25%
Quarterly 30-Year Treasury Bond Best Returns
December 31, 2008: 33.38%
September 30, 2011: 30.71%
March 31, 2020: 26.21%
March 31, 1986: 23.10%
Inflation expectations are shifting. In a rare event, inflation breakeven curves have inverted, which means inflation estimates on a 5-year horizon are rising much faster than they are on the 30-year horizon.
Some sovereign funds were able to position their fixed income portfolios into shorter-duration fixed income assets, given very low yields and potential capital losses associated with rising interest rates from such low levels.