The violent upswing in interest rates this month has wreaked havoc on bond funds.
The yield on the 10-year Treasury has jumped almost 50 basis points this month, peaking at 2.23% yesterday morning, its highest level since April 2012. It's since settled back to around 2.15%, but the damage has largely been done.
The Barclays Aggregate Bond Index has lost 1.8% this month, and other than bank loans, which have eked out a 0.26% gain, every single bond fund category at Morningstar Inc. is in the red for May.
Nontraditional bond funds and world bond funds, which, in theory, are supposed to offer a place to hide from rising interest rates, have lost 0.15% and 2.64%, respectively.
Those two categories have been a favorite of investors this year, taking in $12 billion and $6.3 billion, respectively, from February through April, according to Morningstar. Only bank loans, which have taken in around $16 billion, have had more inflows over those three months.
Not even shortening duration has helped much. Short-term-bond funds, which had $12 billion in inflows through April, have lost 0.32%.
Short-term bonds have been even more popular in exchange-traded funds this year, taking in $17 billion through May 23, up from $7.8 billion in 2012 and $10.4 billion in 2011, according to BlackRock Inc. The $12.3 billion Vanguard Short-Term Bond ETF (BSV), the largest such ETF, is down 0.48% for the month.
The good news is that the interest rate surge may be short-lived.
“The Fed doesn't want rates jumping too quickly,” said Bryan Novak, senior portfolio manager at Astor Asset Management LLC. “That's not the desired effect. They'll start trying to talk it down.”
Economic growth and inflation, two key drivers of interest rates, are also far from humming along beautifully, Joanna Bewick, portfolio manager of the Fidelity Strategic Asset Allocation Funds, said at a recent press event.
Still, May has proved a harsh reminder for investors that when interest rates rise, there's aren't many hiding places in the bond world.