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The Great Repricing Of Long Term Money The most important lesson in this chart is simple The safety of the borrower never guaranteed the safety of the purchase price. The longest duration Treasury ETF is down roughly 67% from its March 2020 peak as the 30 year Treasury yield moved from about 0.8% to roughly 5.6%. That is what duration risk looks like when investors buy decades of future cash flows at extremely low starting yields and the required return later resets dramatically higher. Why The Loss Was So Large Long duration bonds are extraordinarily sensitive to changes in interest rates. When yields rise, the present value of distant cash flows falls. Zero coupon Treasuries magnify that effect because nearly all of their value comes from a payment far into the future rather than regular coupon income along the way. The result is counterintuitive to many investors The U.S. government can remain fully capable of paying its obligations while an investor in long duration Treasuries suffers an enormous mark to market loss. Credit risk and interest rate risk are not the same thing. The Bigger Signal A rising Treasury yield does not automatically mean the economy is strong. Long yields reflect several forces at once Expected future short term rates Expected inflation Real economic growth expectations Treasury supply Term premium Uncertainty about future policy Investors may therefore demand higher yields even as economic conditions deteriorate. The 1970s demonstrated this clearly. High inflation, expensive energy, weak growth and elevated rates were able to coexist. Eventually monetary tightening helped suppress inflation, but only after enormous pressure had accumulated across the real economy. The Adjustment Happens Slowly Markets can reprice almost instantly. The economy cannot. A homeowner with a fixed mortgage may feel little immediate impact from higher Treasury yields. A company with debt locked in for five years may continue operating normally. The damage appears when refinancing arrives. A loan originated at 3% or 4% eventually becomes a loan priced at 6%, 7% or higher. Projects that once worked financially stop working. Margins compress. Hiring slows. Investment gets postponed. Weak borrowers begin restructuring. That is why the full economic effect of a bond selloff can arrive years after the selloff begins. The Historical Warning Silicon Valley Bank offered one example of how quickly duration losses can become a real world problem when long lived assets collide with unstable funding. The broader lesson was not that Treasuries were unsafe. The lesson was that balance sheets built for a permanently low rate world could become extremely fragile once that world disappeared. In my opinion the most important part of this chart is no longer the loss investors already suffered. It is the refinancing environment being created for everyone else. Long term money has already been repriced. The unanswered question is how much of the economy has actually finished adjusting to that new price.

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