Bond ETFs Tumble to 2023 Lows as Rates Surge

The 10-year Treasury note yield spiked to a 16-year high on Thursday.

Reviewed by: Lisa Barr
Edited by: Lisa Barr

Bond ETFs hit their lowest levels of the year as interest rates surged on Thursday. The benchmark U.S. 10-year Treasury note yield jumped as high as 4.33%, eclipsing its 4.24% peak from 2022 and reaching its loftiest level since 2007. 


US 10-Yr_Treasury_Yield


The yield on the five-year Treasury note also hit a 16-year high at 4.47% on Thursday, while the yield on the 30-year Treasury bond climbed to a 12-year high at 4.42%. 

As yields spiraled higher, bond ETFs that track Treasuries slid (bond prices and yields move inversely).  

The iShares 20+ Year Treasury Bond ETF (TLT)—this year’s second most popular ETF by inflows—is now down nearly 5% year to date. 

The iShares 7-10 Year Treasury Bond ETF (IEF) also hit a new low for the year and is now down by 1.2%. 




Higher for Longer  

The recent upside acceleration in market-based interest rates comes despite expectations that the Fed is likely finished hiking rates. Probabilities based on the pricing of fed funds futures suggest there is a 58% chance the fed funds rate ends the year where it is now. 

Still, just because the Fed might be done hiking the fed funds rate—a benchmark for short-term interest rates—doesn’t mean other interest rates are done going up. 

After all, the yield curve is still inverted; the 10-year Treasury yield is currently around 100 basis points below the fed funds rate. 

If investors start to believe the Fed might hold the fed funds rate at its peak level for a while, it makes sense for them to start pricing that into longer-term interest rates. 

This “higher for longer” idea is one espoused by the Fed itself, but it’s been buttressed by recent strong economic data.  

A model from the Federal Reserve Bank of Atlanta estimates that U.S. gross domestic product in the third quarter could be growing at a 5.8% annualized rate—well above what the Fed or most economists have been expecting.  

Such strong growth is welcome on the one hand, but it also introduces the risk of inflation picking up again.  

To push back against that risk, the Fed is likely to maintain a hawkish bias in its monetary policy.  

Bond ETFs Getting Hit  

Treasury bond ETFs aren’t the only funds getting hit by the “higher for longer” narrative. The iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD) has nearly wiped out all of its gains for the year. 

The two biggest bond ETFs, the iShares Core US Aggregate Bond ETF (AGG) and the Vanguard Total Bond Market Index Fund ETF (BND) have also given up their gains. 




AGG and BND hold a combination of various types of investment-grade bonds, including Treasuries, mortgage-backed securities and corporate bonds. 

One bond ETF that is holding up better than others is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). The junk bond fund is still sporting a gain of more than 4% for the year. 




Stronger economic growth means the issuers of high-yield bonds are less likely to default, which is good news for the holders of those bonds.  

Still, if rates keep surging, at some point that will likely weigh on junk bonds as well.  

Sumit Roy is the senior ETF analyst for, where he's worked for 12 years. Before joining the company, Roy was the managing editor and commodities analyst for Hard Assets Investor. He lives in the San Francisco Bay Area, where he enjoys climbing the city’s steep hills, playing pickleball and snowboarding.