The 2022 Bond Market Crash: The Worst Bond Performance Since 1788 and Its Lessons

In 2022, the American bond market experienced an unprecedented rout, marking the worst performance of government bonds since 1788 according to an analysis by Bank of America. The iShares 20+ Year Treasury ETF (TLT), a benchmark for long-term American bonds, plunged by -31% over the year. Even more surprising, 30-year government bonds underperformed the S&P 500, a very rare phenomenon that illustrates the severity of the correction. As a reminder, the S&P 500 ended 2022 down -18.1%, which means that long-term sovereign debt was more penalized than stocks, a reversal of historical paradigms.

This spectacular drop is mainly explained by the surge in real interest rates in an inflationary context. The rise in bond yields, nearly +4.25% on the American decade, mechanically led to a fall in bond prices. The high duration of the TLT ETF, close to 18 years, amplifies this sensitivity: a 1% increase in rates theoretically implies an 18% drop in the fund’s price. In 2022, with a cumulative rise in long-term rates of about +4.25%, theory suggests a raw correction of -75%, however softened by the coupons paid.

Understanding the Mechanics: Why Interest Rates Made Bonds Plunge

The price of a bond moves inversely to its interest rate. Duration measures the price sensitivity to a rate change. For the iShares 20+ Year Treasury ETF (TLT), the duration is about 18 years, which means a 1 percentage point increase in rates causes an 18% drop in price.

Year Change in US 10-Year Rate (%) Theoretical TLT Price Drop (%) Actual TLT Performance (%)
2022 +4.25 -76.5 (theoretical) -31