While many people doubted early in the year that a 1994-style sell off in the Treasury bond complex is inconceivable, this is precisely what we got in the two months between May and July, as we showed previously [4].
[5]
But while the bond rout of 1994 is merely one example of a rapid Treasury selloff, there are many more, and many that put both 1994 and the (first?) great bond dump of 2013 to shame.
Highlighting them all is the topic of the just released blog post by the NY Fed titled "The Recent Bond Market Selloff in Historical Perspective [6]." Here is what the authors Tobias Adrian and Michael Fleming find:
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.
Our algorithm identifies thirty-one selloffs in which the cumulative return for the ten-year, zero-coupon bond drops below -5 percent. The average cumulative loss for such selloffs is 11.9 percent, and the worst selloff resulted in a 38.0 percent loss (for an episode between June 1980 and August 1982). The average length of a 5 percent or larger selloff is 303 calendar days (excluding the recent selloff for which the end date isn’t yet known), the minimum is 16 days (for an episode between June and July 1985), and the maximum is 1,309 days (for an episode between April 1967 and November 1970).
Recent Selloff Comparable to 1994 and 2003 Episodes
The chart below plots the selloffs, showing that the recent one is comparable in magnitude, albeit somewhat smaller, to those seen in 1994 and 2003. In particular, the recent selloff reached a trough on July 5 with a cumulative return of -11.3 percent, versus -13.8 percent in August 2003 and -17.5 percent in November 1994. None of these episodes compares with the steep losses seen in the two Volcker era selloffs of 1979-80 and 1980-82.
[7]
Pace of Selloff Comparable to 1994 and 2003 . . .
The chart below plots the cumulative returns of three selloffs over time, relative to the start of each selloff, showing that the pace of the recent selloff is comparable to that observed in 1994 and 2003. Returns are quite similar over most of the first month in all three episodes. At the end of the first month through the second month, negative returns continue in the recent selloff and in 2003, but remain flat for some time in 1994. Returns in 1994 continue their downward trend after that, and bottom out about a year after the selloff starts, well after the end of the plotted event interval.
[8]
. . . And Steeper than Most Historical Episodes
The next chart plots the cumulative returns of the recent selloff over time, relative to the distribution of returns for all selloffs over time, showing that the recent selloff is fairly steep by historical standards. That is, since the recent selloff started, cumulative returns are between the median and fifth percentile of returns for all selloffs at a comparable stage. As of July 5, the returns for the recent selloff were just above the fifth percentile of returns compared with all selloffs at a similar stage. Over the rest of July, yields decreased modestly and cumulative returns increased somewhat as a result.
[9]
Putting all the largest selloffs together, we get the following:
We present a table listing attributes of the fifteen largest bond market selloffs since 1961. The three selloffs highlighted in this post—1994, 2003, and 2013—are ranked fifth, ninth, and thirteenth, respectively, and are highlighted in blue. Beyond reporting figures behind the earlier discussion, the table shows the change in the ten-year, zero-coupon yield and in the spread between the ten-year and three-month yields between the start of each selloff and the maximum selloff date. Of note, the recent episode and 2003 are instances in which the yield spread moved almost as much as the ten-year yield itself (that is, the three-month yield rose little), explaining the importance of the term premium in those cases. In contrast, the 1994 episode is one in which the yield spread rose little (that is, the three-month yield increased almost as much as the ten-year yield), explaining the importance of short-term rate expectations in that case.
The Top 15 bond dump ranking in question:
[10]
In other words, despite all the wailing from bond market participants, the "Great (first?) Selloff of 2013" only ranks 13th of all such Risk On (or is that Off for rate PMs?) episodes.
Which means there is much more room to fall when the "big one" finally comes.