"The Recent Bond Market Selloff in Historical Perspective"

From the Federal Reserve Bank of New York's Liberty Street Economics blog:

Long-term Treasury yields have risen sharply in recent months. The yield on the most recently issued ten-year note, for example, rose from 1.63 percent on May 2 to 2.74 percent on July 5, reaching its highest level since July 2011. Increasing yields result in realized or mark-to-market losses for fixed-income investors. In this post, we put these losses in historical perspective and investigate whether the yield changes are better explained by expectations of higher short-term rates in the future or by investors demanding greater compensation for holding long-term Treasuries.

Increase in Yields = Decrease in Returns
As yields and prices move inversely, the recent sharp rise in yields has resulted in losses to the owners of Treasury securities. The chart below shows that returns based on the ten-year, zero-coupon yield were -9.8 percent for the two-month (forty-two-day) period ending July 5 (zero-coupon yields are from Gurkaynak, Sack, and Wright [2006]). The decline is large by historical standards, but somewhat smaller than that observed in two-month windows in 1994 (‑12.6 percent), 2003 (-14.4 percent), and other recent periods (for example, -10.3 percent in late 2010).



Selloffs Defined
Because the length of a bond market selloff may be shorter or longer than two months, we adopt a flexible approach to defining selloffs. Our procedure is to first cumulate returns for a hypothetical ten-year, zero-coupon Treasury security from June 1961, identifying each time cumulative returns reach a maximum for the period-to-date. We then go through the data a second time, cumulating returns from the maximum-to-date. Whenever a cumulative return drops 1.2 percent below the maximum (corresponding to a loss of two standard deviations of daily returns), we say that a selloff has started. When the cumulative return later passes the two-standard-deviation threshold on the way up, we say the selloff has ended....MUCH MORE

 

HT: Abnormal Returns