“Since 1980, the Treasury market has posted a calendar year negative total return on three occasions,” writes Matthew Hornbach, Morgan Stanley’s top interest rate strategist. “Only three. In over 30 years.”
This chart of Treasury security returns from Hornbach is a bit tough to look at. Fortunately, it comes with a table.
Hornbach offers some additional commentary on the last time returns were negative:
The 2009 episode is worth investigating further because the next year of negative returns in the Treasury market is likely to occur while monetary policy remains accommodative. In February 2009, the President signed into law the large fiscal stimulus package known as the American Recovery and Reinvestment Act of 2009. In March, the Fed added to their unconventional easing program by agreeing to purchase $300bn in Treasuries, $750bn in agency MBS and $100bn in agency debentures. Easier monetary policy combined with easier fiscal policy took Treasury yields off their lowest levels in decades by pumping up growth and inflation expectations. The result was the worst calendar year for Treasury returns since 1980.
The Fed intends to keep monetary policy loose through 2015. Given this, Hornbach doesn’t expect tight monetary policy to contribute to the next year of negative Treasury returns.
The 2009 episode suggests that, without tighter monetary policy, higher growth and inflation expectations must contribute to negative total returns for nominal Treasuries. Whether rising inflation expectations played a part in each year of negative returns is difficult to say, given that TIPS began trading in 1997. We can only say for sure that dramatic rises in market-based inflation expectations were a part of the 1999 and 2009 negative total return episodes. Still, it seems reasonable to assume that inflation expectations also rose in 1994 along with growth expectations.
Then some believe that tighter monetary policy could come sooner than later.