Existencedeeply concernedIf the trading price drops to half the face value then the market is very short. In most cases, this meansinvestIt is believed that the bond issuer is in financial difficulty and may default.
So when the U.S. When the 30-year Treasury bond fell below this level, it surprised the market. Treasury notes due in May 2050 fell to 49 29/32 on Monday, falling below 50 for the second time in the past two months.
Of course, the United States is not in danger of imminent default. US Treasuries are generally considered the safest government bonds in the world. During the pandemic, investors took advantage of falling interest rates and invested in long-term bonds. Unsurprisingly, the Federal Reserve (Fed) implemented its most aggressive interest rate hike in decades and was ignored. His misery was clearly reflected in the price.
The worst is the bond due in 2050, which was originally issued with an interest rate of 1.25%, an all-time low for a 30-year bond. New 30-year bonds issued this year are offering interest rates in excess of 4%.
U.S. Treasury bonds with maturities of 10 years or more have fallen 4% so far this year, a record 29% decline due in 2022 and more than double the decline of the overall bond market, Bloomberg data shows. The price of such bonds is most sensitive to changes in interest rates or duration.
U.S. 30-year treasury bondYieldIt hit a record low of 0.7% in March 2020, hit a 12-year high of 4.47% last month and hit 4.4% on Monday.
The US Treasury Department initially issued $22 billion of bonds due 2050 at a par value of 98% of face value (two additional amounts were later issued). The value of the bonds declined rapidly as later bonds were issued with higher coupons.
The Fed is the largest investor in these bonds, holding about 19% of them. Other investors who bought and took long positions included ETFs, retirement annuities and insurance companies, which are also major holders of such bonds.
Of course, once inflation declines, long-term bond yields will move downward, making these bonds faster winners than other bonds.
At least they have one more attraction for investors. Because of the large price discounts, these securities have positive convexity, meaning that when yields change, prices rise more than they fall.
For example, if yields fell 100 basis points, the bond’s par value would rise by about 11 cents per dollar. If yields fall by 100 basis points, the value of each dollar falls by about 9 cents.
“They are very convex, so even if liquidity is low, these bonds are still interesting,” said Mustafa Chowdhury, chief rates strategist at Macro Hive Ltd.