US Treasuries: Blood on the Streets

Baron Rothschild famously said the time to buy is “when there’s blood on the streets, even if the blood is your own”. Thanks to high inflation and interest rates, there’s blood on the streets in the US treasury market. But the deep sustained selloff could be creating an opportunity to buy.

Key Takeaways

  • US treasuries are now in a drawdown comparable to stocks in 2008.
  • Lower prices mean US treasuries offer attractive income again, above shares and cash.
  • With the worst of inflation behind us, now looks like an attractive moment to enter.

Investors know that the past three years have been bad for US government bonds. But few have fully appreciated how bad. Spelling things out: 2022 was the worst year ever for US treasuries. The 10-year treasury – the bond of greatest interest to financial markets, as it forms the basis of the “risk-free rate” – provided a return of -18% for the calendar year.

From 1928 – 2023, the 96-year period for which NYU Stern School of Business provides data (graph above), there have only been 19 down years for 10-year treasuries. During these down years, the average return was -4.6%. The -18% drop in 2022 was one of a kind and meant the 4% rally in 2023 only provided modest retracement.

Looking at 30-year treasuries, which are more sensitive to inflation expectations, things look worse. Long duration US treasuries are now in an almost 50% drawdown. This compares to the selloff stocks experienced during the dotcom collapse in 2000 and the financial crisis in 2008. We can see this in the graph below.

Income Opportunities Look Good

These drawdowns have been painful for bondholders. However, with prices where they are today, there are opportunities. In particular, treasuries now pay attractive income – especially compared to stocks.

In the aftermath of COVID-19, as central banks sent interest rates to zero, treasuries offered little income. The S&P 500’s dividend yield bested that on even 30-year treasuries. A feat quite remarkable considering US tax laws disincentivise dividend payments. (Many US companies prefer buybacks, which are more tax-effective).1

Today by contrast, US treasuries across the curve offer nearly triple the yield of the S&P 500. And as the payments (coupons) treasuries make are fixed, investors can lock in the yield until the bond matures. They do not have to worry about variability in the way they do with dividends.

As an added bonus, the lower prices and higher yields mean that treasuries are now offering what’s called “cheap positive convexity”, in the jargon. What’s that? To shortcut the maths and rough over the details, the bigger coupons that treasuries now pay mean that their prices can go up faster than they can fall. And should interest rates fall, treasuries will generate bigger capital gains than equivalently rising interest rates will create losses. This is reflected in the graph below, which shows how 2-year US treasuries make a gain even if rates rise 300 basis points.

Is Now Really the Time?

Investors inclined to buy treasuries in today’s market may still ask about timing. What has fallen can fall further; what is cheap can get cheaper. Sticky inflation and a strong labour market may work to keep rates high and bond prices low.

Yet from our perspective, the worst of inflation is likely over, and the US labour market is showing signs of deterioration.

When a lot of investors look at inflation, they look at the inflation rate over the past 12 months. As of February 2024, yearly core PCE inflation sat at 2.93%, almost 50% above the Fed’s 2% target.2

Yet in a fast-changing world, a better picture is achieved by taking inflation over the past quarter and annualising it, as doing so takes out what happened 6 – 12 months ago, which can quickly lose relevance.

If we run this exercise, we can see that over the past six months, core PCE inflation in the US has been within the 2% target, in large part thanks to falling goods prices. This suggests the Federal Reserve is on track to achieve its goal.

Similarly for labour markets, investors often look at the unemployment rate – for very good reasons – when assessing how workers are doing. And seeing an unemployment rate of 3.7% compared to a long-term average of 5.7%, some investors fear this could be inflationary.3 Yet for the Federal Reserve’s purposes, the better number to look at is quarterly wage growth. After all, employment is only an inflation threat if it creates higher wages. Here, too, the numbers are coming down.


Investors usually use treasuries for income and capital stability. Yet a painful reality is that investors who bought them during COVID-19 have received neither. Coming into 2024, however, the battlefield looks quite different. And those looking towards fixed income for income have never had so many options.

Related Funds

USTB: The Global X US Treasury Bond ETF (Currency Hedged) (ASX: USTB) invests in US Treasuries across the yield curve while providing currency hedging.