The bond market selloff is getting more serious, and investors are starting to feel the pain.
The bellwether 10-year Treasury note yield rose to 2.24% Monday, up from an all-time low of 1.37% on July 8th. Bond prices fall when yields rise.
Despite low yields and the potential for losses in a reversal, investors have poured nearly $193 billion into bond funds through September, according to the Investment Company Institute, the funds' trade group. ICI said $89 billion had flowed into bond funds from July through September. Morningstar (MORN) estimates that $12.3 billion poured into taxable bond funds in October, and another $1.5 billion flowed into municipal bonds.
While damage was light in the early part of the rise in rates , it has become more pronounced in several fund categories. For example, long-term government bond funds typically fare worse when rates rise than shorter-term ones, and this has certainly been the case so far. Vanguard Extended Duration Treasury Index (VEDTX), for example, has plunged 19.24% since July 8. The fund has $1.3 billion in assets.
Close behind is PIMCO Extended Duration (PEDIX), down 18.15%. The fund has $542 million in assets. Both funds are up for the year, however: PIMCO's offering has gained 4.48% year-to-date, while Vanguard's is up 3.72%.
Intermediate-term government bond funds held up better, with the median fund down 1.76%, versus a 12.91% median loss for long-term government bond funds. Putnam Government Income (PGSIX) was the leader in the group, with a 1.08% gain since July 8.
Like most of the better performers in this category, the Putnam fund invests primarily in mortgage-backed securities. The worst fund in the intermediate government category, Nationwide Government Bond A (NUSAX), is a mix of Treasury securities and mortgage-backed securities.
The flexible income category, which most investors use as a one-stop shop for fixed income, shows a wide range of outcomes since July 8. On the negative side is USAA Flexible Income (UIFIX), down 6.84%. The fund has an intermediate duration of about 10 years. The average credit quality of its holdings is BB, according to Morningstar. It has 25% of its assets in a U.S. Treasury bond stripped principal payment, a form of zero-coupon bond.
On the other side of the flexible income category is the Permanent Portfolio Versatile Bond (PRVBX), which is up 4.64% since July 8. The fund has a 3.53-year effective duration and consists mainly of corporate issues.
High-yield funds continue to hold onto their gains, with the median fund up about 3.5%, and inflation-adjusted bonds,
a recent investor favorite, have fallen 1.31%.
How long the bond selloff will continue is an open question. Much of the rise in rates has been sparked by speculation that the new Trump administration will step up spending while cutting taxes, which could balloon the deficit.
“Now that Republicans are in control, there's no concern about debt and deficits,”
Steven Blitz, chief economist at Pangea Market Advisory, told the Wall Street Journal.
Others think that rising rates can't continue without a robust economy at its back. “Excess global production capacity and unprecedented demographic change may soon cool post-election mania,” said John Lonski, chief economist for Moody's Capital Markets Research Group. “The impossibility of making America young again renders it all the more difficult."
