10-year US Treasury yields are experiencing their worst returns in 100 years, while high interest rates are attracting investors to "buy the dip."

The U.S. Treasury market is experiencing its worst return cycle in over a century, but the high yields have become a reason for some investors to re-enter the market.

The 10-year Treasury yield briefly broke through 5% this week, hitting a 19-year high. New Federal Reserve Chairman Warsh announced the first interest rate hike in three years this week to address persistently high inflationary pressures.

Goldman Sachs' latest calculations show that the five-year rolling return on 10-year US Treasury bonds has fallen to its lowest level in over a century, with the actual returns as disastrous as those during the post-World War I and World War II periods and the stagflation of the 1970s .

Despite lingering concerns in the bond market, funds have not completely withdrawn. According to EPFR data, US bond funds have recorded net inflows for 71 consecutive weeks, with high yields drawing some new funds back into the fixed-income market.

Worst in a century: The double whammy of inflation and interest rate hikes

The Bloomberg Aggregate Bond Index—considered the "S&P 500" of the bond market—is down 1.6% year-to-date (total return) as of last Wednesday's close. The index covers U.S. Treasuries, corporate bonds, mortgage-backed securities, and other government-backed debt, but excludes ultra-short-term Treasury bills.

The index fluctuated between positive and negative at the beginning of the year, but has been declining since August as global oil prices climbed to nearly $100 per barrel. Rising oil prices have fueled inflation expectations, directly eroding the real purchasing power of fixed-income assets, with a particularly significant impact on longer-duration bonds.

In a report released Thursday, Goldman Sachs' Christian Mueller-Glissmann strategy team characterized the current performance of 10-year US Treasury bonds as the worst in over a century, using a five-year rolling return as a benchmark. The report pointed out that even without adjusting for inflation, nominal returns are extremely dismal; and inflation-adjusted real returns are "almost as bad as those after World War I, World War II, and the 1970s."

George Catrambone, head of fixed income for the Americas at DWS, attributed this situation to two main factors: first, "the Federal Reserve and the market have lost patience with inflation remaining above target for an extended period"; and second, the protracted war with Iran continues to put pressure on the market.

5% mark: a signal of new funds entering the market

The sharp rise in yields, while severely impacting existing holders, has also created more attractive entry conditions for new funds.

"The higher the yield, the more attractive it is to put money into bonds, at least for new funds," said Brian Rehling, co-head of global fixed income strategy at Wells Fargo Investment Institute.

Cullen Roche, founder and chief investment officer of Discipline Fund, holds a similar view. He points out that the sluggish bond returns over the past five years were fundamentally due to the already low yields and the excessive amplification of interest rate risk. Five years ago, the 10-year US Treasury yield was around 1.3%. "But as yields rise and prices fall, these assets are becoming more attractive," he says.

Roche likens the current logic of buying long-term bonds to buying a discounted used car—over time, the rate at which the bond's value declines will gradually slow, while the fixed coupon income generated each year will not change due to market price fluctuations.

Bob Michele, chief investment officer at JPMorgan Asset Management, previously stated that his team had begun buying long-term U.S., Japanese, and Australian government bonds, believing current prices to be "extremely cheap." He pointed out that the coordinated policies of the European Central Bank, the Federal Reserve, and the Bank of Japan would form a support chain for the bond market, and Bessant's long-term bond repurchase program was also seen as a key stabilizing force, indicating that there is still room for further expansion of the policy toolbox.

Fund flows: Short-term bonds are favored, while long-term bonds remain neglected.

Despite the overall pressure on the bond market, capital inflows have not stopped, but there is a clear structural divergence.

According to Winston Chua, a liquidity analyst at EPFR, U.S. bond funds have recorded net inflows for 71 consecutive weeks. Short-term bond funds absorbed 12.2% of their assets under management (approximately $139.9 billion) during this period, while long-term bond funds absorbed only 2.9% (approximately $19.3 billion).

It is worth noting that the aforementioned capital inflows occurred against the backdrop of relatively flat performance in short-term bonds and a nearly 5% drop in the net asset value of long-term bond funds.

However, market optimism regarding the bond market still needs to be approached with caution. The Federal Reserve predicted on Wednesday that inflation may close at around 3.7% this year and will not return to the 2% policy target until 2029.

When asked about the sell-off in Treasury bonds, Warsh attributed the pressure to multiple "hotspots" around the world and other factors, emphasizing that 10-year U.S. Treasury bonds are "the most important asset in the world" and "the risk-free benchmark for pricing almost all assets."

Roche acknowledged, "Long-term bonds still carry risks, but they have become more attractive; short-term bonds are already very attractive." Uncertainty surrounding the course of the Iran war and whether inflation will fall as expected remain the two major variables hanging over the bond market.

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