A Fresh Perspective on the
Great Bond Bear Market
By Victor Sperandeo with
the Curmudgeon
Introduction:
Most Wall Street newsletters are read for one purpose: to
help investors make money. Yet much of the financial news cycleregardless of
formatfocuses on retrospective narratives. They
explain what supposedly happened to interest rates, inflation, growth, or asset
prices after the fact, often reducing complex market outcomes to a
single generic cause.
That approach is almost always inadequate. Financial markets reflect the
interaction of monetary policy, fiscal policy, credit conditions, liquidity,
positioning, expectations, global capital flows, and investor psychologynot
one isolated variable.
For full disclosure, Victors framework differs materially
from the prevailing economic doctrine taught in many major universities. In his
view, modern neo-Keynesian economics too often functions as a policy framework
designed to support political objectives, rather than as a reliable guide to
economic reality or to improving outcomes for the average working American.
There are many ways to frame economic data to justify a
political goal. As the prominent
Austrian economist
Ludwig von Mises observed: ECONOMICS IS THE (subjective Social) SCIENCE
OF THE MEANS TO BE APPLIED FOR THE ATTAINMENT OF ENDS CHOSEN."
Importance of the U.S. Treasury Market:
The U.S. Treasury market is the foundation of the global
financial system. It provides the benchmark risk-free
rate, underpins collateral markets, supports bank balance sheets, anchors
global pricing of credit and equities, and remains central to the dollar-based
reserve-currency system. Without a functioning and credible Treasury market,
the United States as we know it could not sustain its present financial and
economic structure. This makes the Treasury market the most important market
for investors to understand.
A Look Back at the 2022-2023 Bond Bear Market:
That follows the
bond market rout that began in March 2022, which ranks among the most severe fixed-income drawdowns in modern
financial history.
The 20222023 downturn was historically the worst
bond market in roughly 180 to 240 years, matching levels not seen since 1842," according to Edward F. McQuarrie, emeritus
Professor, Santa Clara University - Leavey School of Business who has studied financial asset
returns over centuries. Lets unpack
that quote:
·
Worst since 1842: Investment historian
Edward McQuarrie noted that 2022's collapse was the worst for U.S. bonds since
1842, during a deep economic depression.
·
240-year scope: Extending historical
records back to 1792 (the founding era of U.S. public financial markets), only
1842 experienced a comparable wipeout for fixed-income safety.
·
Aggressive Fed rate hikes: The Federal Reserve rapidly
increased interest rates to fight multi-decade high inflation, crashing
existing bond prices.
·
Long-term pain: Long-term government bonds
suffered peak-to-trough drops near 38%, eclipsing even the tough Volcker
inflation era of the late 1970s and early 1980s.
Following a substantial rally in Treasury notes and
bondsfrom October 22, 2022, through September 8, 2024the broader fixed income
market downtrend resumed. It gathered considerable strength this year.
Bond Bear Market Intensifies in 2026:
Since the first quarter
of 2026, U.S. Treasury notes and bonds across the yield curve have suffered significant price
declines as yields spiked sharply higher (see References below for explanations). The selling has been especially
severe in long-dated Treasuries, where duration amplifies the capital loss from
rising rates.
The 10-year Treasury note yield rose from approximately 4.20%
on April 30th to 5.283% by October 2nd (see
chart below). That is a substantial repricing in just five months for the
benchmark interest rate market that establishes borrowing costs throughout the U.S.
and global financial system. During that
same time period, the 30-year Treasury bond yield
moved from roughly 4.98% to 5.63% range.
Heres a six-month chart of the U.S. 10-year Treasury note yield:
Chart courtesy of Trading Markets
..
The strong up move in U.S. note and bond yields (declines in
prices) is more consequential than a routine adjustment in Federal Reserve
expectations. It reflects a market increasingly concerned about three issues:
persistent inflation risk, large and continuing Treasury issuance to finance
federal deficits, and insufficient demand for long-duration government debt at
prior yield levels.
Theres also increased supply from corporate debt to fund AI
buildouts. The Wall
Street Journal reports that 49% of new investment-grade bond issuance year to
date in 2026 has been AI-linkeda figure that underscores how the financing
of AI data centers, compute infrastructure and supporting power systems is
reshaping bond market fundamentals and technical factors.
ΰThis
will be the subject of a future Curmudgeon blog post. Please email the
Curmudgeon (ajwdct@gmail.com) if you are interested in this topic.
The key market message is straightforward: investors are
demanding a higher return to hold long-term nominal U.S., municipal and
corporate debt (see Cartoon below). This is not principally a default-risk
story. It is a duration, inflation, and fiscal-supply story.
Long bonds are most exposed because a fixed coupon is locked
in for decades. When yields rise, the present value of those distant payments
falls sharply. As a result, long-duration Treasury holders can suffer major
mark-to-market losses even though the bonds are backed by the U.S. government.
The implications extend beyond the U.S. Treasury market:
·
Higher Treasury yields raise mortgage rates
and corporate borrowing costs.
·
Higher real yields pressure equity
valuations, particularly long-duration growth stocks.
·
Refinancing maturing federal debt at higher
rates increases annual interest expense and can deepen future deficits.
·
Continued weakness in long-dated Treasuries
would signal that the market requires still higher compensation to absorb
expanding federal debt issuance.
In short, the Treasury selloff is a warning that the U.S.
cost of capital is being repriced higher. Unless inflation expectations
decline, fiscal financing needs moderate, or recession-driven demand for safe
assets re-emerges, pressure on long-term Treasury prices is likely to persist.
Real World Examples of Painful Losses:
The 30-year U.S. Treasury yield touched approximately 5.63%
this week, which was the highest level (lowest price for previously issued
bonds) since June 2002. Rapidly rising yields create steep price
drops for existing, lower-yielding long-term fixed-income assets.
ΰCan you imagine the public outcry if the
S&P 500 index declined from its Index current price of 7,722.72 (October 2,
2026) to its June 26, 2002 closing low of 973.52? That would take a decline of 87.39% from
Fridays closing price!
The Vanguard Extended Duration Treasury ETF (EDV), a
proxy for long-duration U.S. Treasury
exposure, had declined by 58.73%
over the preceding five years through October 2, 2026. That percent decline
excludes coupon income, which, at an assumed annual yield of approximately
3.75%, would add roughly 18.75% in cumulative interest over the period.
Even after accounting for coupon income, the message
delivered by the bond market is clear: long-duration U.S. government debt has
imposed major capital losses on investors. Whether by design or by consequence,
U.S. fiscal and monetary policy has taught investors that purchasing
long-duration Treasury debt can carry substantial mark-to-market risk and, over
certain periods, significant negative total returns.
Victor's Conclusions:
In my view, the most likely near-term mechanism for
stabilizing this debt market crisis is a recession. A material economic
slowdown would reduce demand pressures, weaken inflation expectations, lower
long-term yields, and potentially restore demand for Treasury securities.
I believe the early stages of that slowdown will become
visible during the current quarter. The prior quarters GDP performance may
prove less durable than headline figures suggest, as growth was supported in
significant part by inventory accumulation ahead of the back-to-school period,
Halloween, Thanksgiving, Christmas, and other seasonal holiday demand. If final consumer demand does not validate those
inventory assumptions, the adjustment could weigh on production, margins,
employment, and GDP in the quarters ahead.
..
Cartoon
of the Week (courtesy of Chat GPT):
..
References
from Recent Curmudgeon/Sperandeo blog posts:
Curmudgeon/Sperandeo:
Debt Markets Continue to Decline After the Feds Policy Blunders (09/21)
Curmudgeon: Severe Bear Market in U.S. Treasury Notes and
Bonds Persists (09/14)
..
Wishing you
good health, success and good luck. Till next time
..
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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