The largest fund for owning long-dated American government bonds has lost more than half its value since its 2020 peak. It holds no meme coins and no biotech with one product and a prayer. It holds loans to the United States Treasury, which is about as close to a certainty as finance gets.
Bloomberg reported that the fund known by the ticker TLT closed at a record low on 23 September. By 2 October it was down about 8% for the year, while a plain S&P 500 fund was up more than 13%. This is the part of a portfolio to keep everyone calm.
Safe From What, Exactly
The word safe has two jobs, and only one of them is being done. A government bond is safe from default. Lend to a stable government, and you will almost without question get your money back on the agreed date, with interest along the way. What is not promised is what the bond would be worth on any day before that.
Here is why. Say you lent £100 for thirty years at 3%. A few years later, the same government is offering new lenders 6%. Nobody will pay you £100 for a bond that pays half the going rate, so if you want to sell, the price drops until the buyer’s return matches what they could get elsewhere. Your bond has not broken. It has been outbid.
The longer the wait for your money, the bigger the markdown. The industry measures this with a number called duration, and the rough rule is friendlier than the name. A fund with a duration of 15 loses about 15% of its value for every one percentage point rise in yields. Long bond funds tend to carry a figure in the teens. Short ones sit in the low single digits, meaning they move so much less.
The Year the Cushion Went Flat
On 7 October the yield on the 10-year US Treasury rose above 5.35%, its highest since 2002, and the 30-year reached 5.70%. In London the same day, Reuters reported the 30-year gilt touching 6.036%, a level last seen in January 1998. Japan’s 10-year yield is at a three-decade high. France is approaching 5%.
No single villain is responsible. US inflation was 3.4% in the year to August, the Federal Reserve raised rates in September, Washington’s deficit is projected at $1.9tn, and companies are borrowing heavily to build AI. All were asking the same lenders for money at once, and lenders have noticed they can charge more.
The second surprise is that the cushion stopped cushioning. Bonds earned their place because they tended to rise when shares fell. Bloomberg’s Eric Balchunas noted in September that one core bond fund used to gain about 90% of the time the S&P 500 dropped. Recently that figure has been closer to 40%. A seatbelt that works four times in ten is still a seatbelt, though you would want to know.
The Loss Has a Mirror Image
None of this runs in one direction. A falling bond price and a rising income are the same event seen from opposite sides. The person who bought years ago at 3% is sitting on a paper loss. The person buying today is being offered well over 5% a year by the US government for the next three decades, and about 6% by the British one. I wrote about the borrower’s side of this when Britain sold thirty-year gilts at a record yield. This is the lender’s side.
A bond and a bond fund are different. Hold a single bond to the end, and you are repaid in full, whatever the price did in between. A fund never reaches the end. It keeps selling bonds as they shorten and buying longer ones, so its price lives permanently in the present.
Investors have noticed the higher income all the same. Balchunas flagged about $7bn flowing into TLT in mid-September, and the fund fell 3.5% over the following fortnight. Being early and being wrong feel identical for quite a long time.
The Four-Minute Check
One check takes about four minutes. The bond factsheet shows its duration figure. It is always there, usually on page two, where funds keep the numbers they would rather you asked about.
The point is not to find a reason to sell. It is to know in plain terms how far a fund falls if yields keep climbing, and how much it pays to wait. Those two numbers, duration and yield, turn a vague unease into a sum anyone can do. For anyone new to all this, my earlier piece on how the bond market works is the gentler place to start.
Safety was never a property of the bond. It was a question about when you need the money back.
The Jacqueline Brand — knowledge builds confidence, and confidence builds wealth. This is editorial commentary for information and education only. It is not financial, investment or professional advice, and nothing here is a recommendation to buy or sell any investment. The Jacqueline Brand is not authorised or regulated by the Financial Conduct Authority. The value of investments can fall as well as rise, and past performance is not a guide to future returns. Figures were correct at the time of publication. Always do your own research and consider speaking to a regulated adviser. Where cryptoassets are discussed, they are high risk and largely unregulated in the UK, and you could lose all the money you invest.
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