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Bonds were not the traditional safe haven that investors could count on in 2022. Instead of luring in cash amid an equity bear market as investors moved out of risk, bonds struggled with the unprecedented Federal Reserve tightening cycle.
The Fed pushed borrowing costs to their highest level since 2007. Starting in March, the central bank’s Federal Open Market Committee began hiking the fed funds rate from a target of 0%-0.25% to 4.25%-4.5% by December.
Tighter financial conditions (which include higher rates and lower stock prices) became the mission for Fed Chairman Jerome Powell and company as the FOMC grappled with the highest U.S. inflation rates in 40 years.
Government bond rates naturally followed. The 10-year U.S. Treasury yield (US10Y) surged from around 1.5% at the start of 2022 to more than 4.2% at its peak in October and about 3.9% currently. The 2-year yield (US2Y) popped to a peak of more than 4.5% in November from 0.7% to start the year and now sits near 4.35%.
As a result, long-term government bond prices fared worse than the broader stock market, with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) down about a 30% for 2022, compared with a drop in the S&P (SPY) of a little more than 20%.
Seeking Alpha editors picked some of the best bond calls on the site for the year. Here’s a look:
TLT Pessimism
Among some of the notable ideas from contributors, Bubba Trading recommended shorting TLT in January at a time when the ETF was above $140 a share. Now, TLT looks to close the year at around $100.
“Dovish monetary policy was necessary in March 2020, but the central bank’s inflexibility and inaction have poured fuel on the inflationary fire,” Bubba Trading wrote at the time. “Had the central bank and government looked inward and realized their policies were responsible for rising prices, they would have acted a lot sooner when the bond market began ringing alarm bells during the summer months.”
Bubba Trading reiterated its TLT bearishness on technical signals near $115 in June.
“While the Fed began increasing the Fed Funds rate in March and started reducing its swollen balance sheet in June, the bond market had been falling over the past two years,” the firm said. “The central bank’s balance sheet reduction lowers government and mortgage-backed securities holdings, putting upward pressure on interest rates for deferred maturities.”
Similarly, Seeking Alpha contributor Paul Franke warned in January the potential for a bond market collapse, noting “the Fed is way behind the money growth curve.”
Shorting the Long End
But while TLT sank, the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) notched a yearly gain of more than 80%.
In July, contributor William Mack gave TBT a Strong Buy at a time when much of the yearly gains were still ahead of the ETF. Mack called shorting bonds a textbook macro trade at a time when inflation risks remained tilted to the upside.
Outperformance for Short Duration
Damage to bond prices was much less severe on the short end of the Treasury curve. The iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) lost 5% on the year, a good alternative to nearly every equity sector save Energy.
Contributor Trapping Value assessed SHY in January as a place to park cash, but favored alternative ETFs: the PIMCO Enhanced Short Maturity Active Exchange-Traded Fund (NYSEARCA:MINT) and the BTC BlackRock Short Maturity Bond ETF (BATS:NEAR).
Both MINT and NEAR outperformed SHY slightly, falling less than 3% in 2022.
An Uncertain 2023
Looking to 2023, Wall Street strategists are predicting outperformance on bonds as equities drift, with the Fed slowing and eventually ending its rate-hike cycle. But a terminal Fed rate expected to reach above 5% could make tough sledding for bonds during the coming year.
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