Once the Federal Reserve started to increase interest rates in March 2022, bonds faced unprecedented losses.
In the beginning of the 1980s, the Federal Reserve defeated excessive inflation via the implementation of economically painful interest rate rises. These rate hikes, in turn, sowed the seeds for a bull market in fixed-income securities that would last for the next four decades.
Last March 17, 2022, the streak finally started to come to an end.
The Federal Reserve increased interest rates for the first time since 2018 on that day, after having kept them at a record low of 0-0.25% for its benchmark lending rate for the previous two years in order to shield the United States from a pandemic catastrophe.
It has not yet come to an end. During the course of this week, the Federal Reserve raised its target range for the federal funds rate by another 25 basis points, bringing it to a range of 4.75–5%. This marks the highest level it has been since 2016 and comes in the midst of a fight to reduce the highest and most persistent inflation since the time of the Reagan administration.
Along the way, there has been a rise in the number of monetary victims, with the fixed-income market being one of the most significant. The previous year saw bond markets suffer record losses across the board, from investment-grade corporate bonds to U.S. Treasuries.
The origins of a Long-Term Rally
The beginning of the 1980s was marked by a variety of geopolitical and economic calamities, including the Iran hostage crisis, the Soviet Union’s invasion of Afghanistan, and rising inflation in the United States.
Paul Volcker, chairman of the Fed, spearheaded the campaign against increasing prices. In December 1980, when annual inflation reached 13.5%, the Fed effectively triggered a U.S. recession by increasing its rate to an almost inconceivable 19-20%.
The strategy worked. Inflation among consumers decreased to 10.3% in 1981 and 6.1% in 1982. The level was not surpassed again until the previous year.
The Bond Bull Market Continues for Years
Notwithstanding a few bumps, the bond market had a wonderful run over the next four decades.
In contrast to stocks, where a 20% shift in value defines bear and bull markets, bond market runs do not have similarly set beginning and ending prices. Instead, bond bull markets represent an extended decline in interest rates, and vice versa for bond bear markets.
Yields and bond prices move in the opposite direction, and yields started a long-term decline in late 1981. The benchmark 10-year U.S. Treasury yield, which is used to price vast amounts of fixed-income products, reached an all-time high of 15.84% on September 30 of that year.
By August 1986, the 10-year yield had fallen below 7% due to the Fed’s consistent rate reductions throughout the decade. It increased to about 8% at the beginning of the 1990s but dropped to 5% following September 11th.
Seven years later, amid the global financial crisis, the Fed lowered interest rates to record lows and maintained an accommodating monetary policy for the majority of the following decade. The 10-year yield hit a low of 1.43 percent in July 2012 and has never exceeded 3.20 percent before to last year.