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
