During the pandemic, investors faced an extraordinary interest-rate environment. On December 31, 2020, the 10-year Treasury yielded just 0.93 percent and the 30-year Treasury 1.65 percent. Yet many bond funds continued to hold or acquire substantial long-duration exposure.
That history matters today. A recent Wall Street Journal article, “Wealth Management Has a $3 Trillion Problem: Investors Are Keeping Too Much Cash,” describes financial advisers trying to persuade clients to move money out of money-market funds and into bonds and other investments, while many investors remain reluctant.
My recent papers, Can a Treasury Ladder Beat a Bond Fund? and Is the 30-Year Yield Really That Attractive?, approach the issue from two different directions.
The first compares investor-built Treasury ladders with bond funds and finds that ladders can outperform passive bond-fund strategies.
The second asks whether today’s relatively high 30-year Treasury yield is sufficiently attractive to justify the substantial duration risk.
Together, they suggest a natural next question: What happened to investors who bought long-duration bond funds when yields were exceptionally low, particularly during the COVID period?
The literature suggests that warning signs of large potential losses from the lower interest rates during the pandemic were visible. Morningstar observed in 2021 that the average core bond fund yielded only 1.21 percent while carrying a duration of 5.9 years—almost three times the duration of the average short-term fund for only 26 basis points of additional yield. A Federal Reserve study found mutual funds “reaching for duration,” including through Treasury futures, in part to keep their portfolios aligned with benchmark indexes.
A manager can competently follow a benchmark and still produce an outcome which looks deeply flawed from the investor’s perspective. If fund mandates, benchmark construction, product design, and conventional asset-allocation advice collectively encourage investors to maintain long-duration exposure almost regardless of valuation, the process can become mechanically blind to price and risk.
Suppose an investor placed $10,000 on December 31, 2020, in each fund and reinvested all distributions. By early September 2026:
Intermediate and broad bond funds have largely recovered on a total-return basis. Reinvesting interest distributions—particularly at the much higher yields available after 2022—substantially reduced the losses. A $10,000 investment would now be worth approximately $9,805 in Vanguard Intermediate-Term Treasury (VGIT), $8,983 in iShares 7–10 Year Treasury (IEF), and $9,726 in Vanguard Total Bond Market (BND).
Long-duration funds have not recovered, even after giving them the same benefit of reinvested distributions. The same $10,000 would be worth only about $6,250 in iShares 20+ Year Treasury (TLT), $4,807 in Vanguard Extended Duration Treasury (EDV), and $4,326 in PIMCO 25+ Year Zero Coupon Treasury (ZROZ).
The pattern is remarkably clean: the longer the duration, the deeper and more persistent the damage. This is not simply a story about one bad year in 2022.
Individual long bonds also suffered enormous mark-to-market losses. The 10-year and 30-year Treasury yields rose from 0.93 and 1.65 percent at year-end 2020 to roughly 4.76 and 5.23 percent in early September 2026. A $10,000 investment in comparable individual securities would consequently have principal market values of roughly $8,460 for the 10-year and $5,070 for the 30-year, before counting coupon payments already received.
Buying an individual 30-year Treasury at an exceptionally low yield does not eliminate the problem. Thirty years is a very long time, and the investor remains exposed to substantial price risk if interest rates rise.
The COVID experience raises a broader question about the investment process. If the prescribed investment strategy of a particular fund is driving investors toward a cliff, why keep following it? Fund sponsors, index designers, advisers, and active managers all made choices which kept investors exposed to very long duration at exceptionally low yields. Federal Reserve evidence that some funds even increased duration to remain close to their benchmarks makes the issue especially troubling.
There is also a market-wide constraint. Large institutions can reduce their holdings of 30-year Treasuries, but they cannot all do so simultaneously without pushing prices down and yields up until other buyers emerge. If the Federal Reserve becomes that buyer, it can absorb duration from the market, but only by expanding its balance sheet and creating additional bank reserves. That transfers some of the duration risk to the Federal Reserve and changes the monetary consequences; it does not make the underlying risk disappear.
So, the mandate or investment strategy governing long term funds is still a choice, not a law of nature. Long-duration funds exist because sponsors choose to offer them, benchmarks are designed to include certain securities and maturities regardless of market conditions.
The process does not seem to allow consideration – At low yields is duration risk sensible for investors?