The Treasury Bond Massacre and the Spike to 5% Mortgage Rates: This is All Going Very Fast


by Wolf Richter, Wolf Street:

Junk bonds are still in la-la-land though, Apocalypse but not now.

When investors demand higher yields on bonds, motivated sellers must lower the price of those bonds in order to sell them. And yields are now spiking and prices of bonds with longer maturities are plunging.

The one-year Treasury yield spiked by 38 basis points during the week, including 12 basis points on Friday, to 1.67%, the highest since October 2019. There is now a huge 150 basis point spread between the one-month yield of 0.17% and the one-year yield of 1.67%:


This is one heck of a fast-moving train. And the Fed hasn’t even done much other than one tiny rate hike and lots of talking about what it’s going to do, which is raise rates far faster and further than previously imagined, and kick off Quantitative Tightening “as soon as” May to finally crack down on inflation which is now spiraling out of control. And the credit markets got the memo.

The two-year Treasury yield spiked by 33 basis point during the week, including a massive 17 basis points on Friday, to 2.51%, the highest since April 2019.

The volatility in the two-year yield is huge, the worst since the Financial Crisis, with massive spikes interrupted by some modest drops. This chart shows the day-to-day changes in the two-year yield in basis points. The biggest one-day spike in this cycle, 25 basis points, occurred on February 10:

The 10-year Treasury yield spiked by 34 basis points during the week, including by 14 basis points on Friday, to 2.48%, the highest since May 2019.

The 10-year yield has been rising since the low point of 0.52% on August 4, 2020, which marked the top of the biggest bond bull market ever that had started in October 1981. At the time, the 10-year yield had peaked at 15.8%, after CPI inflation had peaked in April 1980 at 14.6%.

From October 1981, yields zigzagged lower, interrupted by big upticks in between, and since 2008 pushed down by the Fed’s interest rate repression and massive QE. Now the result is the highest inflation since 1981, with February CPI at 7.9% and worse inflation to come.

The bond massacre in dollars. Market prices of bonds with long remaining maturities get ravaged when interest rate rise.

For example, the price of the iShares 20 Plus Year Treasury Bond ETF, which holds Treasuries with maturities of 20 years and longer, fell 1.4% on Friday to $128.66. This was down 25% from the peak at the end of July 2020. The 40 years of bond bull market have lulled people to sleep about the risks of bond funds.

But not junk bonds yet. This massacre is playing out with Treasury securities and with investment-grade corporate bonds, particularly the highest-rated corporate bonds that closely track Treasury securities.

Junk bond yields have been slowly rising from the low point last summer, and the spreads to Treasuries have been slowly widening. But since March 15, while all heck broke loose in the Treasury market, junk bond yields have actually dropped and remain historically low, and their spreads have narrowed and are historically narrow.

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