(Bloomberg) — Fifty cents on the dollar is the lowest price in the bond world. In most cases, investors believe that the debt seller is in such financial trouble and can succeed.
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So it raised eyebrows when US Treasuries fell below Monday’s levels. The security’s expectations for May 2050 touched as low as 49 29/32, falling below the 50-cent level for the second time in the past two months.
The US, of course, is in no danger of defaulting in the near future. Treasuries are generally considered the safest government debt in the world. The price, in this case, shows the extent of the pain inflicted on investors who piled into long-term debt during the pandemic, then were caught off guard when the Federal Reserve did more. Decades of tightening monetary policy.
The bond due in 2050 was hit particularly hard, as the interest rate — 1.25% — was the lowest in the 30-year Treasury. Investors gained more than 4 percent on the 30-year debt issued last month.
“These bonds have below market coupons and investors need to be compensated for that,” said Nancy Davis, founder of Quadratic Capital Management.
Treasuries maturing in 10 or more years — those with the highest price sensitivity to changes in interest rates or duration — are down 4% this year, with a record 29% drop by 2022, according to data compiled by Bloomberg. That’s more than double the loss in the broader Treasury market, the data said.
The yield on the 30-year bond 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 4.4% on Monday.
The Treasury initially sold $22 billion of the 2050 notes at 98 cents each (it later did two so-called open-backs, which added to the high volume).
The Fed is the largest investor in the debt, holding about 19%, a legacy of its bond-buying program (quantitative easing). Other buy-and-hold investors like exchange-traded funds, pensions and insurance companies dominate.
Of course, if declining inflation drives a slide in long-term yields, these bonds will turn into big winners relative to the rest of the yield curve.
They have at least one other attractive property for investors. Because of deep depreciation, the securities have what is known as positive convexity, meaning that they rise more than they fall in value for a given yield change.
For example, if their yield drops 100 basis points, the bonds will rise to 11 cents. For the same yield increase, the bonds would fall to just 9 cents.
“They have very positive correlations, and that makes them a very interesting combination,” said Mustafa Chowdhury, chief rates strategist at MacroHive Ltd.
(Updates from Investor Commentary, Trading Levels from the fifth paragraph)
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