Andres Victorero
For the reason that bond market peaked in late 2021 simply earlier than the Fed launched into its try and tame inflation by mountain climbing charges, it has been painful to be an investor in “risk-free” Treasuries at almost all factors on the curve.
Essentially the most ache has been felt on the long-end of the Treasury curve on notes expiring in 10-20+ years.
Whereas the 20+ 12 months Treasury ETF (TLT) is down 28% on a complete return foundation over the past two years, chances are you’ll be stunned to see that the high-yield (junk) bond ETF (HYG) is definitely now up on a complete return foundation over the identical time-frame.
HYG has additionally simply outperformed the mixture bond market ETF (BND), which is down 7.4% over the past two years.
Going again 5 years as an alternative of two, had you determined to go with the “safety” of long-term Treasuries (TLT) over the higher-risk junk bond house (HYG) again in early 2019, you are still kicking your self as HYG is up 18.3% over the past 5 years in comparison with a ten.6% decline for TLT over the identical time-frame.
As proven under, TLT was truly up almost 50% YoY versus a decline of greater than 10% for HYG on the time of the COVID Crash in early 2020 when the Fed lower charges to zero whereas riskier property like shares and junk bonds have been tanking.
However ever because the COVID Crash lows, long-term Treasury yields have been trending larger (that means decrease bond costs).
As a result of the high-yield bond ETF has a decrease common period than TLT, it has been spared the huge drop in worth that long-term Treasury bonds have skilled.
Couple that with excessive yield spreads being in a comparatively good place, and HYG is at the moment buying and selling near a five-year excessive on a complete return foundation. TLT buyers are jealous.
Simply as longer period labored in opposition to TLT as charges have been rising, it reaps the rewards during times when charges decline.
For the reason that 10/19/23 peak within the 10-year yield, for instance, TLT has rallied 16.3% whereas HYG is up lower than half that (7.8%).
Editor’s Notice: The abstract bullets for this text have been chosen by Looking for Alpha editors.
