A Chart for the Ages

Cullen Roche once said, “The stock market is the only market where things go on sale and all the customers run out of the store….”

This behavior might seem irrational, but it’s understandable when you consider how averse people are to losing money. The fastest way to make the pain disappear is to sell, regardless of the irreparable damage you may be doing to your long-term returns.

This aversion to losses, apparently, does not carry over to the bond market. The bond market might be the only market where customers run into a store that’s on fire. I’m not sure I’ve ever seen a chart like this. Most of the time, total assets will track the current price. If something is going up, investors pile in. If something’s going down, investors rush out.

Long-term bonds are down 10% this year and are in a nasty 45% drawdown. And yet, investors keep piling in, plowing $16 billion YTD into TLT. The only ETF that’s taken in more assets this year is VOO, Vanguard’s S&P 500. The building might be on fire, but investors know that eventually, the sprinklers will turn on and the fire engines will show up.

Jurien Timmer tweeted this chart, saying:

“With every tick higher in yields (and lower in duration), the risk-reward of owning Treasuries improves. The scatter plot below shows the expected return for the Barclays Aggregate index if the yield goes up 100 bps (horizontal) or down 100 bps (vertical). We were at the lower left and are now at the upper right. At a duration of 6.2 years and a yield of 5.2%, the return upside is +11.4% and the return downside is just -0.9%. Just a few years ago, that same tradeoff was +7.1% vs -5.0%.”


When rates went from 0 to 5, there was no income to buffer the fall. Investors were swimming naked. There’s no telling how high rates will rise, but this time, investors are at least wearing a life jacket.