Historic Bond Market Crashes and Rate Shocks
The 2022 bond market crash was the worst in over 40 years, with the Bloomberg Aggregate Bond Index falling 13% as the Federal Reserve aggressively raised rates to combat inflation. The 1994 bond massacre saw similar Fed-driven losses. The 1980 Volcker shock pushed 10-year Treasury yields above 15%, causing massive bond portfolio losses. Unlike equity crashes, bond bear markets are primarily driven by rising interest rates rather than credit defaults, though credit crises can trigger separate selloffs.
Yield Curve Dynamics and Recession Signals
The Treasury yield curve (2-year vs 10-year spread) is a reliable recession indicator, with inversions preceding every recession since 1970. The 2022-2023 inversion was the deepest since the 1980s. Current yield curve dynamics reflect market expectations for Fed policy, inflation trajectory, and economic growth. Credit spreads between investment-grade and high-yield bonds signal corporate stress levels and risk appetite, widening sharply before recessions and credit events.
Duration Risk and Fixed Income Strategies
Bond duration measures price sensitivity to interest rate changes, with longer-duration bonds experiencing larger losses when rates rise. The 2022 crash particularly impacted long-duration Treasury and investment-grade corporate bonds. Investors can manage duration risk through laddering strategies, floating-rate instruments, and Treasury Inflation-Protected Securities (TIPS). Money market funds and short-duration bonds provide capital preservation during rate-hiking cycles.