Bond Market Tells the Real Story

A grim outlook for interest rates poses dire consequences for bondholders.

While everyone else twiddles their thumbs and waits for the next missive from the Federal Reserve, the bond market has spoken loudly and clearly about the near-term (and possibly long-term) direction of interest rates.

Below is a chart of last week's price action for TLT (long-term U.S. Treasury bonds ETF) ....


What is particularly surprising about the bond market's reaction is that it doesn't necessarily coincide with the plethora of analysis in the mainstream and financial media.

It would seem that bond traders and investors have a different interpretation of Chair Powell's remarks than what is currently being force-fed to us, or they are making their own statement about the situation.

It is possible that bond traders heard something that others did not. Nevertheless, the action in the bond market is telling and foreboding.

The sizeable drop in bond prices came on Thursday, the day following the Fed's announcement that it would hold interest rates steady at current levels.

The drop in bond prices amounts to more than three percent. Some of that drop was reversed on Friday, but significant damage was done.

The significance of the drop takes on additional emphasis when viewed on a long-term basis. Below is a one-year chart for TLT...


There are several things apparent in the chart immediately above, which add to the negative implications inferred.

First, the drop on Thursday took bond prices below their lows of last October, almost one year ago.

Second, the drop came on the heels of a decline in prices dating back to early April.

Third, the recent drop was an exclamation point on the complete reversal of all gains in bond prices since the lows last October.



This chart tells us more than we might care to know about bond prices.

When the Federal Reserve announced their intention to pursue a higher interest rate policy in March 2022, it was shortly after an earlier peak in TLT at 155 in January 2022.

Since then, Treasury bond prices have dropped more than forty percent. However, the drop in bond prices and the corresponding increase in interest rates started almost two years before that.

The peak in bond prices (and the end of four decades of lower to abnormally low interest rates) came in March 2020. The Fed announcement in 2022 merely confirmed what the bond market was saying: interest rates are going higher.

Since March 2020, long-term U.S. Treasury bond prices have declined by FIFTY PERCENT.


All of the damage is made worse by the effects of inflation. Bondholders have lost half of their investment value in three and one-half years. The loss is exacerbated by the fact that any remaining dollar value has lost measurable purchasing power over those same three and one-half years.

While most people continue to speculate, postulate, and theorize about a reversal in the Fed's higher interest rate policy, the bond market is not hearing it.

The drop in treasury bonds is telling us not to expect a change anytime soon; and, based on Thursday's price action, to expect higher interest rates to probably continue.

Expect more financial and economic damage. (also see Interest Rates Could Double/Treble Again)

Kelsey Williams

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!