Much hullabaloo about nothing

Treasury securities underpin the financial system. But, despite the biggest bond losses ever, the financial system is robust.

“The bank is on fire” by DALL•E

It's been a wild couple of years for bond investors. They've had to fight central banks, who, to tame inflation, have been hiking rates like mad. But these rate hikes also pushed up government bond yields, which have cut prices. As a result, fixed-income investors are sitting on enormous unrealised losses. Yet, despite the hubbub, this isn't a disaster. Only leveraged firms with a mismatch between what they owe, when, and what they have will get burned.

Treasury bond returns are in their worst drawdown in modern history. Some economic historians reckon it's been the worst stretch for investors in American government bonds since the 1700s. Holders of the ten-year variety have lost 25%, or roughly $5trn in total, since the start of 2021—a shocking result. But, adjusting for inflation, the picture gets worse. If you bought a ten-year Treasury bond in 2021, you would now have half your purchasing power left. According to Federal Reserve data, these are the mo…