What’s Happening with US Treasuries and Why Aren’t They Rising?

Why Are US Treasury Prices Not Rising?

In recent weeks, one question has dominated discussions among retail investors: why aren’t US Treasury prices rising despite falling interest rates? This seemingly simple query, however, conceals intricate answers within it.

Long-term Treasuries: Current Trends

One of the hardest-hit portfolio categories in this context includes those holding long-term Treasuries, particularly those with maturities exceeding 20 years.
ETFs that focus on these types of bonds, like the well-known TLT, have been experiencing significant capital losses.
This situation may seem puzzling to many, especially as long-term interest rates have decreased.
Yet, this phenomenon can be explained through the mathematical logic related to the steepening of the yield curve.

Understanding Steepening of the Curve

The steepening of the yield curve occurs when the difference between long-term and short-term interest rates increases.
In an inverted yield curve scenario, where short-term rates exceed long-term rates—as we see today—interest rate reductions do not impact the curve uniformly.

Commonly, one would expect that a decline in interest rates would boost the prices of bonds, particularly long-term ones, as they are more sensitive to interest rate changes.
However, when the curve is inverted, the impact of a decrease in rates on the long end of the curve is considerably less pronounced.
Long-term yields were already at historically low levels compared to short-term rates, and a marginal reduction isn’t sufficient to drive significant price increases for long-maturity bonds.
Essentially, the decline in rates hasn’t altered the situation enough, explaining why many investors holding long-term Treasuries are still facing losses.

Inflation Fears and Bond Volatility

Another contributing factor to Treasury weaknesses is the rising fear of a new wave of inflation.
The upcoming presidential elections in the United States are intensifying these worries, creating uncertainty among investors and increasing global bond market volatility.

A key measure of bond volatility is the MOVE index, which tracks implied volatility in Treasury options.
Recently, the MOVE index recorded its largest daily percentage jump since Joe Biden took office.
This spike even surpassed peaks observed during critical moments, such as the collapse of Silicon Valley Bank in March 2023.

However, while the MOVE index is currently at its highest levels for 2024, the stock market seems to reflect less anxiety.
The VIX index, indicating implied volatility in the stock market, has remained relatively contained, suggesting that investor concerns are primarily focused on the bond market.