The other primary role of bonds within a portfolio, that of capital preservation, is also under threat. The threat to capital preservation has yet to manifest, but it is a looming, growing problem. Everyone regards Treasury debt as the safest of investments, but what would it take for Treasury bonds to experience losses?
The short answer: Bonds could face losses if the laws of supply and demand re-assert themselves and lenders start demanding a yield high enough to compensate them for their risks.
The normal price discovery process that occurs when supply and demand intersect has been subverted since the GFC. For literally trillions of dollars of Treasury bond purchases, it simply did not matter what the yield was. Global central banks, insurance companies, commercial banks, passive mutual funds and ETFs, etc., gobbled up mountains of debt without any real concern about the paltry yield they received.
But what if that changes? What would happen to the Treasury bond market if lenders started demanding yields commensurate with the risks they were taking? What if central banks around the world stop stockpiling dollar debt? What if the bond market started to choke on the trillions of dollars of debt floating around? What if lenders started fearing the U.S. would not be able to meet its obligations?