In my March 2021 column I covered a 20-year Treasury bond fund and said it would be a “guaranteed loser.” With a 1.5% yield it was a high risk/low return investment. The article exposed the risk in Treasury bond funds that many thought were safe. It turns out my warning was understated.

What has happened since confirmed my view … and then some. With the rapid rise in interest rates a fund that yielded only 1.52% back then became less valuable (bond prices move inversely with interest rates). This year the fund’s total return is negative 35%.  

I have a new complaint about the fund. While the title of the fund says “20+ Treasury Bond” the average maturity of its holdings is 17 years. Time to rename the fund?

Treasuries are more favorably priced now since the fund yields 4.3%, but that’s still not enough for me to be interested. I’d rather hold investment grade corporate bonds that now yield just over 6%. Nevertheless, a Treasury fund, more than corporate bonds, would help insulate a portfolio if there is a recession in 2023. In an economic slowdown long term interest rates will move lower and the fund’s price will rebound. 

While buying a Treasury ETF is easier than buying individual Treasury securities, there is an advantage to buying the latter.  Unlike an individual bond where a holder knows what to count on at maturity, a fund never matures. As individual issues mature the fund manager replaces them with newer ones. That means as interest rates rise, the price of a fund can fall and fall, more than offsetting the small interest payments. This year is Exhibit A.   

Many other fixed-income funds suffered as rates rose. The iShares Investment Grade Corporate Bond ETF (LQD) has lost 24% this year, which is worse than the S&P 500’s drop. Junk bond funds are tied more to the strength of the economy than they are to rising interest rates so talk of the “R” word has sent those prices lower. SPDR High Yield Bond ETF (JNK) fell 16% this year. It’s been a brutal year for fixed income.  

Bottom line: Treasury bonds have had their worst year in more than 40 years. The steep losses came as a surprise to investors who turned to Treasury funds because of their safety. Their investments were riskier than they thought … unless they have been reading this column.  

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.