Treasuries and the mark-to-market that scares people for no reason (usually)

It is the most common question in fixed income: "I bought Treasuries, the safest asset there is, and my statement shows a 13% loss. How?" The answer sits entirely in one word: marking.

Context

When you buy a 10-year Treasury at a 4.5% yield, you contracted that return to maturity. Hold it ten years and you receive the coupons and your principal back. That is contractual and does not change, whatever happens to the price on your screen.

What changes daily is what the market will pay for that stream of payments today. If the market yield on the same bond rises to 5.5%, your bond — paying 4.5% — is worth less, because anyone can now buy 5.5%.

The analysis: the duration calculation

Price sensitivity to yield is approximated by duration. Rule of thumb: price change ≈ −duration × yield change.

A 10-year Treasury has a duration of roughly 8 years. If yields rise 1 percentage point, the price falls about 8%. If they rise 2 points, it falls roughly 13% once convexity is accounted for.

That is exactly what happened in 2022, when the 10-year went from 1.5% to 4.2%: holders of long bonds saw double-digit drawdowns in an asset with no credit risk. Nothing broke. The contract still held.

And it works in reverse. When yields fall a point, the same bond gains roughly 8% in price on top of its coupon.

When the marking is irrelevant

If the money in that bond has a dated purpose and you chose the maturity to match it, the movement in between is noise. You buy the 2035 maturity because you need the money in 2035.

When it is a real loss

Three situations. First: you need to sell early because of an emergency — then the mark becomes a realized price. Second: you bought long bonds thinking they were an emergency fund; the product is right, the use is wrong. Third: you sell in a panic and turn volatility into a permanent loss, which is the most common and most expensive of the three.

Risks and counterpoints

Treasuries carry no credit risk in dollars, but they carry inflation risk. A 4.5% nominal yield with 3% inflation is a 1.5% real return before tax. TIPS address that specifically, at the cost of a lower stated coupon.

There is also tax: interest is taxed as ordinary income at the federal level, though exempt from state and local tax — which changes the comparison against corporate bonds and municipals depending on where you live.

What to do with it

Match maturity to purpose and mark-to-market stops being a problem. For an emergency fund, use T-bills or a money market fund, where duration is near zero and the price barely moves.

If you want to speculate on falling rates by buying long duration, fine — as long as you know that is a directional bet on interest rates with equity-like volatility, and not "safe fixed income".