A fund that aims to mimic the performance of the massive $55 trillion U.S. bond market is teetering on the edge of its lowest closing point since 2008.
The significant sell-off happening in the approximately $25 trillion Treasury market has been causing a ripple effect throughout the broader $55 trillion U.S. bond market. This situation has brought the shares of the iShares Core U.S. Aggregate Bond ETF (AGG) very close to their lowest closing level since October 2008, as reported by Dow Jones Market Data.
The ETF’s shares saw a slight increase of less than 0.1% on Thursday, reaching around $93.90 per share, according to FactSet, after previously dropping to $93.60. If the ETF closes at this level, it would mark its lowest finish since October 13, 2008, when it ended the day at $91.82, based on Dow Jones Market Data.
This ETF is significant because it follows the highly tracked U.S. Bloomberg Aggregate Bond Index, which serves as the primary benchmark for evaluating the performance of investment-grade bonds. It’s the index that all fixed-income investors aim to outperform each year.
Mike Sanders, who leads the fixed income team at Madison Investments, described the atmosphere in the bond market on Thursday as “edgy.” He mentioned that some stability was returning to longer-term bonds and noted, “The bond market finally realized the Fed is serious about keeping rates higher.”
The Bloomberg “AGG” index primarily consists of longer-term bonds, resulting in an average duration of around six years. So far this year, it has posted a total return of -1.4%, according to FactSet, and it’s currently on track for a three-year return of -15.5%.
The recent sell-off has hit funds that focus on longer-duration bonds particularly hard. For instance, the widely-followed iShares 20+ Year Treasury Bond ETF (TLT) has experienced an 11.4% decline in its performance this year through Thursday.
Mike Sanders, who manages Madison Investments’ core bond fund and two exchange-traded funds, mentioned, “You can still have positive total returns in the intermediate space, which speaks to the back-end in interest rates rising as much as they have.”
In contrast, short-term Treasury bills have remained relatively stable, with yields hovering around the 5.5% range. This steadiness persisted even after Federal Reserve Chairman Powell hinted last week that the central bank might reduce its policy rate only twice next year, rather than the previously expected four times.
Last week, the Fed also maintained its policy rate within a range of 5.25% to 5.5%, marking the highest level in 22 years.
Mike Sanders advised against abandoning fixed-income investments, saying, “I wouldn’t be bailing on fixed-income now. You’ve experienced some losses, but consider where we’re starting from. A slight drop in interest rates can easily recover those losses and even generate some income from coupons.”
Meanwhile, U.S. stocks have faced pressure throughout the week but showed some improvement on Thursday. The Dow Jones Industrial Average increased by about 200 points (0.6%), the S&P 500 index rose by 1%, and the Nasdaq Composite Index was up by 1.3%.
