How Investors Lost Money in Treasury ETFs: A Cautionary Tale

1. The Interest Rate Shock (2022-2023)

What Went Wrong:

• The Federal Reserve raised rates from 0.25% to 5.25% in just 16 months

• Bond prices fall when rates rise (inverse relationship)

• Popular Treasury ETFs suffered:

  • TLT (20+ Year Treasury ETF): -48% peak-to-trough

  • IEF (7-10 Year Treasury ETF): -25% decline

  • SHY (1-3 Year Treasury ETF): -5% (even short-term bonds fell)

Why It Hurt Investors:

• Many bought Treasury ETFs thinking they were "risk-free"

• Failed to understand duration risk (longer bonds fall more when rates rise)

• Assumed bonds would zig when stocks zagged (correlation broke down)

2. The "Safe Haven" Myth Backfires

Investor Mistake:

• Piled into long-duration Treasuries after 2020 at ultra-low yields (~1.5%)

• Expected:

  • Stability during market crashes

  • Negative correlation with stocks

Reality (2022):

• Both stocks AND bonds crashed simultaneously

  • S&P 500: -20%

  • TLT: -30% same period

• Worst year for 60/40 portfolios in a century

3. How Specific Treasury ETFs Lost Money

ETF: TLT, Duration: 17 years, 2022 Return: -31%, Why It Fell: Ultra-sensitive to rate hikes

ETF: IEF, Duration: 8 years, 2022 Return: -16%, Why It Fell: Intermediate bonds got crushed

ETF: GOVT, Duration: 6 years, 2022 Return: -13%, Why It Fell: Broad Treasury exposure suffered

ETF: SHV, Duration: 0.4 years, 2022 Return: -1%, Why It Fell: Short-term held up better

4. Key Lessons for Investors

1. "Risk-Free" Doesn't Mean "No Volatility"

• Treasuries can lose double digits in rising rate environments

• Duration = Risk Meter:

  • 10-year duration → 10% price drop per 1% rate rise

2. Diversification Can Fail

• The classic stocks/bonds negative correlation isn't guaranteed

• In inflation shocks, both may fall together

3. Yield Matters More Than Price

• While prices fell, yields rose (better future returns)

• Investors who held collected higher interest payments

4. Laddering > ETFs for Certain Goals

• Individual bonds held to maturity don't lose principal

• ETFs perpetually roll bonds, maintaining duration risk

Who Got Hurt Worst?

1. Retirees relying on bond ETFs for stable income

2. "Permanent Portfolio" advocates (25% bonds allocation)

3. Trend-followers who bought after 2020 bond rally

Who Did Well?

1. Short-term bond holders (SHV, BIL)

2. Those who waited for higher yields (5%+ by 2023)

3. Active managers who shortened duration pre-hikes

The Silver Lining

By late 2023:

• Higher yields (4-5% vs. 1-2% in 2020) offered better income

• Prices stabilized as Fed paused hikes

• Lesson: Time horizon matters - holders beyond 5 years likely recover

"Bonds are for income, not insurance." — Revised investor wisdom post-2022