In the bond market, when the trading price of a certain type of bond drops to only half of its face value, it is undoubtedly a very low price. In most cases, this scene is a sign that investors believe the debt issuer is in financial trouble and may even default. However, this is happening right now in the U.S. Treasury market, which is often considered a risk-free asset.

On Monday, a batch of 30-year U.S. Treasury bonds issued during the COVID-19 epidemic three years ago fell below this "half-cut line" - this batch of long-term Treasury bonds due in May 2050 once fell to 4929/32 cents per dollar in face value, which was the second time in the past two months that it fell below the 50-cent mark.

certainly,Judging from the logic behind the price changes, the halving of these long-term U.S. bonds does not mean that they will be at risk of defaulting in the future. U.S. Treasuries are generally considered the safest government bonds in the world.

But in this case, the collapse in prices does reflect the pain of the bond bear market over the past few years for bond investors who piled into longer-dated bonds at extremely low yields during the pandemic and were caught off guard after the Federal Reserve implemented the most aggressive tightening of monetary policy in decades.

Why did the cut-in-half situation occur?

This batch of treasury bonds due in 2050 will undoubtedly be particularly severely affected, because the 1.25% yield at the time of issuance was the lowest interest rate for 30-year treasury bonds. By comparison, new 30-year debt issued last month offered a yield of more than 4%.

Nancy Davis, founder of Quadratic Capital Management, said,"The coupon rates on these bonds are well below market rates and investors need to be compensated for this."

U.S. Treasury bonds maturing in 10 years or more - whose prices are most sensitive to changes in interest rates or maturity - fell a further 4% this year after setting a record 29% decline in 2022, according to data compiled by the outlet. The drop was more than double the losses in the overall U.S. Treasury market, data showed.


The 30-year U.S. Treasury yield hit a record low of 0.7% in March 2020, and rose to a 12-year high of 4.47% last month. On Monday, the yield on the longest-dated U.S. Treasury note hovered around 4.4%.

The Treasury Department initially sold the $22 billion in 2050 bonds three years ago for about 98 cents on the dollar (and subsequently renewed them twice). Since the coupons of new bonds issued since then have been higher, the earliest bonds issued have rapidly depreciated in value.

The Federal Reserve is the largest holder of these bonds - holding about 19% - a legacy of its original quantitative easing (QE) policy. Other buy-and-hold investors include ETFs, pension funds and insurance companies.

Is there no chance of bargain hunting?

Of course, given that this batch of long-term bonds due in 2050 has fallen the most, if the U.S. inflation rate falls in the future and causes long-term yields to fall, this batch of bonds may become the big winner outperforming the entire U.S. bond curve.

In addition, they have at least one other attractive aspect for investors - due to their deep price discounts, these bonds have so-called positive convexity, which means that when yields change to a certain extent, prices will rise more than they fall.

For example, if yields fell 100 basis points in the future, the bond's price would likely increase by about 11 cents. If, on the other hand, yields continue to rise by 100 basis points, bond prices will only fall by about 9 cents.

MacroHive Ltd. "They have very positive convexity, which makes them potentially very interesting bonds, although liquidity is likely to be very low," said Mustafa Chowdhury, chief rates strategist.