(Bloomberg) — Fifty cents on the dollar is a very low price in the world of bonds. In most cases, this indicates that investors believe the debt seller is in such financial distress that they might default.
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So when a U.S. Treasury bond fell below that price on Monday, it raised eyebrows. The stock, due May 2050, briefly touched the low of 49 29/32, marking the second time in the last two months that it has fallen below the 50 cent level.
Of course, the United States is not likely to default in the near future. Treasury bonds are generally considered the safest government debt in the world. What the price illustrates in this case is the extent of the pain inflicted on investors who accumulated long-term debt at extremely low interest rates during the pandemic, only to be caught off guard when the Federal Reserve took the strictest measures. aggressive tightening of monetary policy for decades.
The bond maturing in 2050 has been particularly hard hit, given that its interest rate – 1.25% – is the lowest ever for a 30-year Treasury. Investors got more than 4% on 30-year debt issued last month.
“These bonds have below-market coupons and investors should be compensated,” said Nancy Davis, founder of Quadratic Capital Management.
Treasuries maturing 10 years or longer – which have the greatest sensitivity to changes in interest rates or duration – have fallen 4% this year, after a record 29% drop in 2022, data shows compiled by Bloomberg. That’s more than double the losses in the entire Treasury market, the data show.
Yields on 30-year bonds hit an all-time low of 0.7% in March 2020, before rising to a 12-year high of 4.47% last month. They hovered at 4.4% on Monday.
The Treasury initially sold $22 billion of the 2050 securities at about 98 cents (it later conducted two so-called reopenings, thereby increasing the amount in circulation.) Since the bond’s launch, its value has rapidly lost to as the new bonds were sold with higher coupons.
The Fed is the largest investor in the debt, holding about 19%, a legacy of its bond-buying program known as quantitative easing. Other buy-and-hold investors, such as exchange-traded funds, pension plans and insurance companies, also dominate.
Of course, if a decline in inflation fueled a decline in long-term yields, these bonds would just as quickly turn into an overwhelming winner relative to the rest of the yield curve.
They also own at least one other property attractive to investors. Because of the steep price discount, securities have what is called positive convexity, meaning that their price rises more than it falls for a given change in yield.
For example, bonds would rise by about 11 cents if their yield fell by 100 basis points. For a similar yield increase, bonds would only fall about 9 cents.
“They have very positive convexity, which makes them very attractive bonds, even though liquidity is probably very low,” said Mustafa Chowdhury, chief rates strategist at Macro Hive Ltd.
(Updates with investor comments, trading levels starting in fifth paragraph)
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