In the pre-pandemic era, bond investments were largely the domain of institutional funds, shielded from the hustle and bustle of the retail-trading world.
And who could blame them. Fixed-income portfolio managers and analysts faced the Herculean task of seeking returns in a global environment characterized by rock-bottom or even negative interest rates.
Often, they considered themselves fortunate to eke out meager basis points in gains. During this period, pension funds and money-market vehicles were in a frantic search for minimal returns.
The boldest investors ventured into uncharted waters, hunting for yields in high-risk emerging markets, all too often subjecting themselves to wild bouts of volatility.
By the end of 2020, the yield to maturity on an Austrian government’s 100-year bond had dwindled to a mere 0.4%. Meaning, an investment in this security would have only gotten a nominal 0.4% annual return over the next century.
As central banks worldwide unveiled unprecedented stimulus measures to rescue the global economy from the pandemic’s clutches, the market value of negative-yield bonds soared to an astonishing $18.4 trillion by late 2020.
Fast-forward to the end of July 2023, this figure had plummeted to a meager $1.3 trillion, as per Bloomberg data, marking a spectacular sell-off that reverberated through many fixed-income funds and triggered a widespread devaluation of bonds across the globe. That figure could now be even lower given the latest Treasury rout.
Remarkably, the same Austrian secular bond now offers a yield of 3%, but its value has plummeted by more than 85% since its 2020 peak.
Closer to home, the market value of a generic 30-year Treasury bond has wiped out more than half of its value since reaching its zenith in March 2020.
Chart: Long-Maturity Bonds Experience Carnage After Pandemic
Retail Traders Jump On The Bond Market Bandwagon
These seismic tremors in the bond market have served as a stark reminder of how even seemingly impregnable assets can succumb to volatility in a world grappling with rising interest rates and inflation.
But apart from that, they have also given birth to a new phenomenon: the entry of retail traders into the fixed-income arena.
In recent times, discussions surrounding economic variables and bond-related assets have surged within popular retail trader communities on social media platforms.
Tom Bruni, a senior writer at Stocktwits, shared insights during an exclusive interview with Benzinga, remarking that much of the discourse revolves around the broader macroeconomic picture.
Retail traders have come to realize that summer has brought not directionality but volatility beneath the surface, piquing their curiosity about global macroeconomic developments.
The realization that the risk-free rate now hovers around 5% is resonating not only on Wall Street but also in retail traders’ circles.
Bruni further shed light on the growing interest in bond-linked Exchange-Traded Funds (ETFs) on Stocktwits.
Retail traders have been swiftly adding Treasury-related funds, such as the iShares 20+ Year Treasury Bond ETF TLT and the PIMCO 25 Year Zero Coupon U.S. Treasury Index Exchange-Traded Fund ZROZ, to their watchlists.
According to Stocktwits data, the median daily message volume referencing $TLT has surged by 156% compared to the previous year. In the final week of September, there was a remarkable surge in daily message volume, marking the highest point seen all year, and the first week of October is currently tracking to match this heightened activity.
“The number of users with $TLT on their watchlist has grown 16% year-on-year to 20,637,” Bruni said.
To capitalize on the potential for even more substantial gains during this period of heightened bond market volatility, they have become increasingly familiar with Treasury-leveraged ETFs, including the ProShares UltraShort Lehman 20 Year Treasury TBT and the Direxion Daily 20-YR Treasury Bull 3x Shrs TMF.
Now Read: How The ‘January Effect’ Could Spark Tech Stock Renaissance In October, Q4
Photo: Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
