Has 2013 Really Been a Bond Market “Slaughter”?

It seems like everyone’s talking about the great bond market “slaughter” of 2013.  Yeah, it’s been brutal, but not really.  If you’ve been invested in long US government bonds then you’ve been dragged out back and beaten up pretty good.  Other than that, the aggregate bond market really hasn’t done much of anything in 2013.  The iShares Aggregate Bond Index is down about -2.5%.   So, are we really screaming out of every Wall Street window over TWO POINT FIVE PERCENT?

Let’s all take a deep breath and step back from the ledges here.  Let’s try to actually put things in perspective because I am worried that some Wall Streeters are up to their usual tricks of misreporting how things should be benchmarked and overdramatizing things so they can generate some much needed fear driven attention.

First of all, we use the aggregate index to track the WHOLE bond market because anything else is a version of cherry picking.  Just like you wouldn’t say “stocks are getting slaughtered” just because tech stocks fell a lot.  No, you would look at the broad index of stocks and if the index is getting slaughtered then it’s fine to say “stocks are getting slaughtered”.

So, here’s the iShares Bond Aggregate (formerly known as the Lehman Bros Aggregate – now, Lehman bros, there’s a “slaughter”) on a one year basis and the brutal 2.5% decline:


Yes, it’s true.  Parts of the bond market have been pretty beat-up.  The long bond is down 10-15% depending on your duration.  But that’s a slice of the overall bond market.  When we back up and take the big picture view it becomes pretty clear that the bond “slaughter” hasn’t really been anything close to a slaughter, but more like another thing that the media and Wall Street has made a big deal of for no good reason.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

More Posts - Website

Follow Me:

  • http://www.lostoutputclock.com Paul Derpman

    The trend back down for yields is already under way. I think once people realize growth & Fed rate (and even QE) isn’t going anywhere (barring a re-leveraging of households) the market will adjust.

    At this point, it makes sense that the S&P would correct (margin debt peaking, fundamentals weakening) and then Treasuries jumping back up to ’12 prices.

    The reason i say this is because there hasn’t been any real fundamental changes except taper talk and continued tepid growth/jobs numbers. It’s an overreaction that will correct down if you look at the much longer term trend of 10-year yields.

  • Ben Woodward, CFA

    Getting a 2.29% Yield to Maturity for a 5 duration seem like more risk than reward to me. Bonds no longer give you much income…period. If you can lose over 2 years worth of income return with just a 1% rise in rates I don’t bother, but I can understand that if you can’t think of anything better it is your prerogative to plunge ahead. The best case scenario that I can envision for bonds at low single digit coupon(s) is a dismal economy, maybe even a depression, and the thought of that is downright depressing. Do we really believe that lending money to a worsening credit like Uncle Sam for 10 years to receive 2.75% sounds highly enticing? 4% or even much more sounds a lot better to me.

  • jswede

    I suppose you have better ideas – some penny stock that’s going to the moon?

    The yield curve is incredibly steep — in a world with no inflation and no growth — it’s a gift to buy long bonds right now.

    In this (hypothetical) ‘dismal economy’ that ‘depresses’ you to even think about, bonds’ fixed cash-flow would increase in value, so this ‘single digit’ coupon is missing the point. Long bonds that have “lost” 20-25% recently stand to gain that and then some as rates return to, and then pass, rates of 6 mos ago…

  • David

    I always think about the Fed Funds rate as gravity for interest rates. You can get away from it but eventually it will retract back towards the set rate.

  • Greg

    “When we back up and take the big picture view it becomes pretty clear that the bond “slaughter” hasn’t really been anything close to a slaughter, but more like another thing that the media and Wall Street has made a big deal of for no good reason”

    I disagree that its been for no good reason. the reason is (I think) to pump up the stock market. This IS a disingenuous way to do that but if you are in the business of selling stocks it makes sense. Alls fair in love war and turning a buck is it not?

    Cullen, I think you sometimes think that people in the business of selling “savings options” want to be as open and honest as you are. They do not, in my view. Are they bad people? Far from it( with a few exceptions), but they have tied their livelihood to this one thing they sell and they MUST sell it or die.You spend a lot of time weeding through the BS out there but the truth is most of the BS is being sold at great profit.

    Maybe I m reading too much into your last sentence

  • Geoff

    Right. Long rates are ultimately a function of short rates. The longer the short rates are kept low, and are expected to stay low, the more downward pressure it will exert on longer-term yields. It’s simple math. There is only so far that longer-term yields can rise without short rates joining the party. The widest spread in history between 10yr yields and the FFR has been approximately 400 basis points. So if the FFR remains at zero, I’d say the highest the 10yr yield would ever go is 4.0 percent. Granted, that is still a long way from here.

    So forget about QE. That’s a sideshow. Watch the ZIRP.

  • indignado

    It may not be a slaughter, but it does seem like a reason to be very cautious A quick queston: How does the fed´s holding of close to 1,5 trillion in MBS affect real-estate prices and what impact could these holding have on rising UST bond yields if any. Thanks.

  • wallyfurthermore

    This all assumes, of course, that bonds were purchased as an equity investment so that market value and timing of a sale matter. It’s all the ‘cult of equities’ and a very, very difficult mindset for any market commentator to shuck.

  • jswede

    In theory, and in a vacuum, the extra demand would lower rates and make housing more affordable, driving prices higher.

    In reality, the spread between the yields on bonds and the interest rates of the loans have widened out, so it’s much less effective a mechanism than it looked to be on paper pre-MBS purchase program. Also, so few qualify for loans that it’s mostly been driving re-fi’s, not actual sales, having little affect on prices.

    Lastly, mortgage borrowing rates have actually increased since Twist/QE3/QE4 started, and are approaching ‘end-of-QE2′ levels — actually higher than 2H2010 right now. Further proof, in my opinion, that looking at Fed demand in a vacuum, and not considering change of behavior in the rest of the market during periods of Fed intervention, is a mistake.

  • Anonymous

    What are your thoughts on who succeeds Bernanke with regards to ZIRP? When does the zero bound get unwound?

  • http://highgreely.com John Daschbach

    In the past 30+ years there has only been one significant time where the bond market trend has not reasonably correlated with inflation. From 1983 to mid 1984 the bond market at all maturities screamed upwards while inflation was falling extremely fast. Perhaps this was the knee-jerk response of the market to the rapid expansion of Treasury debt.

    But if you look at the inflation data and the bond market across maturities there has always been an uptick in inflation correlated with rising yields except for 1984 (the degree of lag or lead and the overall correlation varies, e.g. the 1995 bond collapse was extreme compared to inflation while the 1998 – 2000 inflation uptick had a smaller bond selloff. Also, all of the major selloffs since 1984 have seen the yield curve collapse (even invert).

    The current selloff in long Tsy doesn’t look like any of the selloffs post 1984. All signs point to continued deflation pressure long term. It can’t really be compared with 1984 because during the selloff that peaked in mid 1984 inflation dropped about 4%. In absolute spreads the yield curve is not as steep as it’s 4% peaks seen in 85, 88, 92, 02, 04, and a few times between 08 and 11, but in relative terms it’s the steepest ever.

    Implicit in the Fed mandate is to prevent serious deflation and there is a great deal of deflationary pressure (especially real wages). I don’t see substantial changes in Fed policy on the horizon. QE may slow, but the short end of the curve it has more impact on isn’t going anyplace unless we see inflation and more robust GDP growth. Fiscal policy (according to common sense and Fed analysis) is going in the wrong direction so low short rates are here for a while most likely.

    Based on long term trends in inflation and the Tsy10yr the long bond selloff is probably near it’s end.

  • Anonymous

    Generally speaking, a flat curve indicates weak growth, and conversely, a steep curve indicates strong growth. With rates on the zero bound and the yield curve predicting growth what is your line of thinking? Is it possible that Bill Gross was right when he stated “very steep” for “a very long time” ……

  • jswede

    my thinking is that markets are optimistic, and wrong, about growth…. yet again.

    backup in rates has more to do with tapering and Fed speak than anything fundamental — once (if) the Fed goes away, or the Taper “news” goes away, we’ll rally in bonds in a low/no growth environment…. yet again – like after QE1 and QE2.

  • Geoff

    Two very good questions. If you get those right, you will make (or save) a lot of money in the bond market over the next couple of years. Regarding the first question, Larry Summers looks like the odds on favorite to succeed Bernanke. The thinking is that Summers will be more hawkish, and will likely unwind ZIRP sooner than Uncle Ben would have done.

    My personal opinion (so take it for what it’s worth) is that the US economy will continue to muddle through with moderate GDP growth and the job market will continue to gradually improve. In which case, ZIRP will be unwound sooner rather than later. But nothing the bond market can’t handle. As mentioned above, the yield curve is already very steep and has already discounted a large part of the unwinding.

  • Geoff

    Nice comment, John. What do you mean by relative terms? Do you mean the ratio?

  • charlesM

    There has been a fundamental change: emerging countries trade balances deteriorating which pushes all these CB to sell their dollars which were kept in TSY. looks like this is still happening

  • Blobby

    Some of us got hammered hard with derivative positions on MBS :(
    Diversification has muted the pain to the loss of a single limb.. :D

  • perpetual_neophyte

    One super minor nit to pick regarding terminology:

    [the great bond market “slaughter” of 2013]
    [the aggregate bond market really hasn’t done much of anything in 2013. The iShares Aggregate Bond Index is down about -2.5%.]
    [So, here’s the iShares Bond Aggregate (formerly known as the Lehman Bros Aggregate – now, Lehman bros, there’s a “slaughter”) on a one year basis and the brutal 2.5% decline:]

    You are conflating “one year” and “year to date.” :)

    I think you make a great point about putting things in perspective and have done so for at least a year (including year to date ;) ) regarding probable effects of a “bursting of the bond bubble” and how different the downdraft was likely to be relative to overstretched equities or other asset classes (or non-asset classes like commodities).

  • Jim

    Agreed, jswede. Also, to address real estate prices generally, recent trends and important changes on the horizon will affect prices in several ways, though it’s difficult to be more specific than that. That’s because some decreases will neutralize (or more) other increases, so it’s something to revisit a year or two from now.

    To wit: 1) While foreclosures across the country are now trending down, a large inventory of distressed properties are about to make their way through nearly half the states that require judicial dispositions (they are not yet even bank-owned). 2) The National Association of Realtors recently cited the increasing (and disturbing) trend of all-cash purchases — not a problem in the short term, but unhealthy over the longer term because those purchasers tend to be flippers, downsizers and young families who cannot qualify for credit. 3) Fannie, Freddie and lenders have been searching for new guidelines to make it easier to qualify for loans, especially in the LTV (loan-to-value) parameters. They are ready to do this without any best practices established since the last housing crisis, which was precipitated in large part by liar’s loans and mortgage control fraud. Banks don’t particularly want to be in the landlord biz, and that element of trust has not yet been fully restored throughout the financial services industry.

  • GregP

    “First of all, we use the aggregate index to track the WHOLE bond market because anything else is a version of cherry picking”

    Cullen- have a deeper look at the history and composition of the AGG.
    1) a/o 2011, the AGG contained only 43% of the US bond market.
    2) the AGG is very actively managed, more so than, say, SPY.
    -E.g. in the mid-2000’s, UST were weighted half as much in AGG as in the early/mid-90’s.
    -Bond/FI types which were once zero-weighted became significant.
    -Other bonds/FI continue to be zero-weighted (excluded).

    A good source is the Babson Capital pdf from 2/3/2011 found at

    So I respectfully disagree with your assertion above :-)
    The AGG itself is rather cherry-picked (though sometimes they’re rotten).

  • http://orcamgroup.com Cullen Roche

    Sure, but this is THE bond benchmark most bond traders use. It’s not perfect, but no index is. But it’s a much better overall view of the bond market than say, just US govt bonds.

  • http://highgreely.com John Daschbach

    It’s not the difference or the ratio because the TVM calculation is dependent upon the interest rate (per period) raised to the power of the number of periods.

    The yield curve between 5yr and 10yr was close to this steep in absolute terms in 1987 (6.93 vs 5.92 and 2.74 vs 1.50). So it’s steeper today in absolute numbers than at any time except after the financial crisis.

    If you take the 1987 10yr and the absolute spread today for the 5 yr and do the TVM calculation with a 1% drop in all yields the 10yr principle gain (if you sold with 10yrs remaining) is 9.1% today and 7.4% in 1987. On the 5 yr it’s 4.9% today and 4.4% in 1987.

    I have calculated this for other spreads and yields but not in a statistically complete manner (including a distribution of periods remaining etc.). However, except perhaps for a few times post crisis when yield spreads (10yr – 5yr) were larger in absolute terms the term premium has never been higher.

    That is what I mean by relative spread.

  • Steve W

    I see where Jeffrey Gundlach is now predicting 3.1% for the 10 year treasury by year end. Just a couple of months ago he was saying the 10 year would head back under 2% by year end.

    In yesterday’s S&P Capital IQ U.S. Investment Policy Committee Notes they think it “unlikely that the Fed will begin tapering next month.” They go to say that “if the jobs numbers soften further, we think they will wait until next year.”

    We live in interesting times.

  • Geoff

    Sure the AGG index may have some flaws but it’s a pretty good index and very widely followed. I wouldn’t say it’s “very actively managed”. It mirrors as much as possible what’s happening in the overall bond universe. For example, if govts start issuing more bonds than corps, the index is going to reflect that.

    But I do agree that it is trickier than your typical equity index like the SPX. The same could be said for any bond index because new bond issues are being added and others are being removed (as they mature or roll out) every day. Equity indices are FAR more stable. I mean, how often is their a new equity IPO? How often are stocks added and subtracted from the SPX? Quarterly?

    That’s why I always say that it is way harder to be a Bond PM than an Equity PM :)

  • Geoff

    Interesting. Thx, John.

  • GregP

    Cullen, by your reply it doesn’t appear that you absorbed the facts in my prior comment, nor considered the Babson article.
    You stated
    “we use the aggregate index to track the WHOLE bond market”
    which is just false.
    Your reply also sets up a straw man alternative.
    BTW, at the time of your original post, the Barclays Agg index was down 3.0%, not 2.5%.
    Off the top of your head- when’s the last time the AGG was down this much, this far into a calendar year? If you need to look that up, then you didn’t have enough historical perspective to write your original post.

    Good blog, but this is my last comment/attempt to engage.
    P.S. I’m a PM.

  • http://orcamgroup.com Cullen Roche

    I read the piece. It doesn’t change my opinion because I don’t know what the alternative is and you didn’t provide one.

    The AGG tracked 43% of the entire US bond market at the time of the Babson piece. That’s a very broad index given the size and scope of the US bond market. And it covers a pretty diverse set of bond types. The S&P 500 only tracks about 60% of the entire market cap of US stocks, but I don’t question, for a second, the validity of it as an index of US stocks because it’s an extremely broad index.

    As I said, the index isn’t perfect, but it’s a pretty broad index as far as bond indices go. And I still don’t see what 2.5% or 3% is worth getting worked up over.

    Sorry if you disagree!

  • Geoff

    “I’m a PM”

    Perpetually Mediocre?