By Sunny Oh
It’s no surprise that bonds have outperformed the rest of the market as fear around the rapidly spreading COVID-19 epidemic sparked selling in stocks and other risk assets.
But the sheer drop in yields have powered U.S. Treasurys with long maturities into one of the strongest-performing assets in this year so far, with more than nine months left until the end of 2020. Their hefty double-digit gains in value poses a sharp contrast to the widely held reputation of U.S. government paper as a low-risk, boring investment that usually offers annual returns in the low single-digits.
The 10-year U.S. Treasury note yield /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +2.01% fell 21.5 basis points to 0.709% on Friday, around 1.20 percentage points below where they traded at the beginning of the year, Tradeweb data show. The 30-year bond yield /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y +1.03% tumbled 44.2 basis points to 1.216%. As yields fall bond prices rise.
Investors say the depth of the U.S. bond-market has attracted investors from all corners of the world despite the rapidly dwindling yields offered by Treasury debt.
“Buying U.S. Treasurys at these levels is about preserving your capital while having the liquidity at your fingertips when you feel that it is safe to go back into the pool,” wrote Kevin Giddis, chief fixed income strategist for Raymond James.
The iShares 20+ Year Treasury Bond exchange-traded fund /zigman2/quotes/206026314/composite TLT 0.00% is up 24% year-to-date. The ETF tracks a basket of government bonds with maturities extending beyond 20 years.
Even gold, another haven investment, has managed a 9.4% gain this year.
This compares with the disappointing performance in risk assets. The S&P 500 /zigman2/quotes/210599714/realtime SPX +1.60% is down 8% in 2020, and the iShares iBoxx $ High Yield Corporate Bond index /zigman2/quotes/204471305/composite HYG -0.18% is on track for a 3.3% loss over the same period.
Fixed-income returns were super-charged for funds tracking the performance of so-called Treasury STRIPS, securities that strip away the interest payments from long-term government bonds and thus leaving only the principal. This makes STRIPs even more sensitive to changes in interest rates than a plain-vanilla government bond.
The Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF /zigman2/quotes/208971340/composite ZROZ -0.19% is up more than 36% year-to-date.
Momentum traders riding price trends have also profited from a fear-driven rally in government bonds that appeared to defy fundamentals, said Kathryn Kaminski, a portfolio manager at AlphaSimplex Group, a managed futures fund. She added such investors have amplified their profits by employing leverage in their bullish bets.
But with yields getting close to zero, and the worrisome potential for a snapback, some investors may start to ask if the bond market will stop serving as a port of shelter in the coming weeks.
“When does the safety stop becoming safety?” said Kaminski.