The carnage with a math reason
2022 was the worst year for US Treasury bonds in decades. The "safe" asset class crashed harder than many tech stocks. The reasons are entirely covered by the previous lessons — coupon rates fixed at issuance, prices inverse to yields, duration setting the magnitude. This lesson is the case study tying it all together.
The setup — historically low rates entering 2022
Coming out of the 2020 COVID emergency, the Fed had cut rates to near zero (0-0.25% range) and bought trillions of bonds. The 10-year Treasury yield was around 1.5% in early 2022. Many investors held long-duration Treasuries (TLT, the 20+ year ETF, was a popular "safe haven" position). Bond funds were yielding ~2-3%, low but considered "safe income."
Then inflation arrived. By March 2022, US CPI was running 8%+ year-over-year. Far above the Fed's 2% target. The Fed had to act.
The Fed's response — the fastest tightening cycle in 40 years
From March 2022 through July 2023, the Fed raised the Fed Funds rate from ~0.1% to 5.25-5.5% — about 525 basis points in 16 months. The fastest tightening cycle since 1980-1981. Market yields followed. The 10-year Treasury yield rose from 1.5% in January 2022 to about 4.5% by October 2022 (and even higher into 2023).
Three percentage points up on the 10-year, in less than a year. For bonds, that's an earthquake.
The math (the duration formula in action)
The 10-year Treasury has duration around 8-9. Apply %ΔP ≈ −Duration × Δr:
%ΔP ≈ −8.5 × 3.0 ≈ −25.5%
So the 10-year Treasury dropped about 25% in price during 2022. Worst calendar year for the 10-year since at least the 1970s.
For longer-duration bonds, the math gets brutal. TLT (20-year+ Treasury ETF) had duration around 17-18:
%ΔP ≈ −17.5 × 3.0 ≈ −52.5% (linear approximation)
Convexity softened the actual loss to about 30%+. Still — long Treasuries lost more than the S&P 500 (which dropped about 19% in 2022). The "safe" asset crashed harder than the "risky" one.
Why this caught even pros off-guard
Most professional investors knew the math but didn't anticipate:
- How fast inflation would rise (the post-COVID surge surprised most economists)
- How aggressively the Fed would react (~75 bp moves in single meetings, unusual)
- How concentrated the rate moves would be (3% in less than 12 months)
The duration math was straightforward; the inputs were wild. Investors holding long bonds for "safety" learned that "low default risk" and "low price risk" are different concepts. Lesson 3-6 (risk-free asset) called this out; 2022 made it visceral.
Bank failures as the second-order effect
Many US banks held large portfolios of Treasuries and mortgage-backed securities at low rates. As yields rose, those bonds dropped sharply in value. Banks held them as "held-to-maturity" (so the losses didn't show up on the income statement directly), but the unrealized losses were massive.
When depositors saw banks like Silicon Valley Bank with huge unrealized losses on bond portfolios, runs started. SVB, Signature Bank, First Republic all failed in March-April 2023. The duration math from this lesson is the financial cause of those failures.
The takeaway
The 2022 bond carnage is the duration formula in action. Rapid Fed tightening sent yields up sharply; long-duration bonds dropped 25-30%+. \"Safe\" Treasuries had stock-like losses. The math was knowable in advance; the inputs (inflation surge, Fed pace) surprised most. The bank failures of early 2023 were the second-order consequence — banks holding low-rate Treasuries that had crashed in value, leading to depositor runs. Bonds aren't risk-free; they're default-risk-free. Big difference.