Bonds Were Already Struggling To Stage A Comeback — 2025 Said, ‘Hold My Beer’
Bonds are often marketed as a safe bet — a way to reduce your portfolio’s volatility as you approach retirement or a thoughtful gift you’d buy your grandchild to help them save. But as the last few years have shown, their stability isn’t a given.
Famous for their “stable” reputation, bonds have been anything but during the Fed’s interest rate hikes. As rates rose, bond values dropped — with some “safe” US government bonds losing half their value. A number of investors have taken that as an opportunity — but the market remains stubborn.
Bad bond bounce: When rates go up, bond values go down. So when the Fed says it’ll cut rates, it’s fair to assume bond values would go up… right? Only in an ideal world. To start 2025, these fixed-income securities are refusing to bounce back. Instead, they’re extending their losses on comments by the Federal Reserve, much to the disappointment of traders who bought long-dated bond ETFs like the iShares 20+ Year Treasury — which is down 38% over the past five years and showing no signs of letting up.
- In December, the Fed floated slowing the pace of interest rate cuts, citing uncertainty about the impact of the forthcoming government on trade, inflation, and the deficit.
- Investors are pricing in the Fed’s statements, resilient economic growth, and strong jobs data into their uncertainty — with the 10-year Treasury yield rising to 4.788% (its highest since Nov. 2023) and the 30-year to 4.966%.
Is It Still “Buying the Dip?”
The Fed’s remarks have extinguished the optimism that carried markets to a strong 2024 close — and that douse of cold water has seeped worldwide, with bond yields in other industrial economies rising alongside the US. Increasingly, investors are wondering if they’re buying the dip at all.
- However, WSJ’s Jon Sindreu says the “rare ‘bear steepening’ trade” worrying investors could be a buying opportunity — since rates should eventually decline.
- Sidreu warns that yields could continue rising in the meantime as investors continue pricing in uncertainty — something called “term premium” — into yields.
Decisions, decisions: Bond woes have had their impacts outside of fixed-income markets, where stocks have been reckoning with extremely rich valuations before the bout of anxiety. The S&P 500 is now down nearly 4% since the Fed’s comments, while the growth-flavored, rate-sensitive Russell 2000 is down 7%. Investors’ new fears are likely temporary, brought on by the Fed’s increasingly hawkish stance — and perhaps a wakeup call about the very real impacts Trump’s “America First” policies could have on the world. But for the right investor, this could present a compelling opportunity.
