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Since the bond market peaked in late 2021 just before the Fed embarked on its attempt to tame inflation by hiking rates, it has been painful to be an investor in “risk-free” Treasuries at nearly all points on the curve. The most pain has been felt at the long-end of the Treasury curve on notes expiring in 10-20+ years.
While the 20+ year Treasury ETF (TLT) is down 28% on a total return basis over the last two years, you may be surprised to see that the high-yield (junk) bond ETF (HYG) is actually now up on a total return basis over the same time frame.HYG has also easily outperformed the aggregate bond market ETF (BND), which is down 7.4% over the last two years.
Going back five years instead of two, had you decided to go with the “safety” of long-term Treasuries (TLT) over the higher-risk junk bond space (HYG) back in early 2019, you’re still kicking yourself as HYG is up 18.3% over the last five years compared to a 10.6% decline for TLT over the same time frame.
As shown below, TLT was actually up nearly 50% YoY versus a decline of more than 10% for HYG at the time of the COVID Crash in early 2020 when the Fed cut rates to zero while riskier assets like stocks and junk bonds were tanking.But ever since the COVID Crash lows, long-term Treasury yields have been trending higher (meaning lower bond prices).
Because the high-yield bond ETF has a lower average duration than TLT, it has been spared the massive drop in price that long-term Treasury bonds have experienced.Couple that with high yield spreads being in a relatively good place, and HYG is currently trading close to a five-year high on a total return basis.TLT investors are jealous.
Just as longer duration worked against TLT as rates were rising, it reaps the rewards during periods when rates decline. Since the 10/19/23 peak in the 10-year yield, for example, TLT has rallied 16.3% while HYG is up less than half that (7.8%).More By This Author:A Big Move In Small Stocks
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