On Monday, the 10-year Treasury yield climbed over 5%, a 16-year high. It’s a level few would have predicted during the long run of rock bottom interest rates that followed the Great Financial Crisis.
The yield swiftly retreated, perhaps as investors closed out short bets against bonds that paid off in recent weeks. But the Monday morning milestone underscored a troubling reality: a new era appears to be dawning in the US Treasury market — and it’s shredding confidence in any predictions for where yields will peak.
The Federal Reserve may very well be at — or near — the end of its most-aggressive interest rate-hike cycle in decades. But at the same time, other forces have continued to push yields higher. The economy has remained surprisingly resilient. Inflation, stubbornly high. And the federal budget deficit is surging, testing the market’s ability to absorb a seemingly endless supply of new US government bonds.
The upshot is that some are sticking to their calls that yields may be near their peak as the impacts ripple through the cost of everything from credit cards to corporate loans, taking the pressure off the Fed to raise rates further. Others, though, say that yields have become untethered and another push higher is far from out of the question.
Here’s a roundup of some views:
Tracy Chen, a portfolio manager at Brandywine Global Investment Management
“I don’t think 6% is out of the picture. Rates will stay higher for longer with the most important reason for this being the high propensity for fiscal spending. We are in a regime change as opposed to the rise in yields just being cyclical. The move is not just because of the resilient economy, it’s more structural” due also to forces including a potentially higher long-run neutral rate and term premium in Treasuries moving back to historical averages.
Chen also is bracing for Moody’s Investors Service, the only rating company that still has a AAA grade on the US, to potentially downgrade it and is wary that Japan will abandon its yield-curve control policy that’s kept rates there low and bolstered demand for US Treasuries. Both of those could an add more fuel to the breakout in rates
John Fath, managing partner at BTG Pactual Asset Management
“We are definitely in unchartered territory and anything is possible now with yields. The government has to wake up to the fact that they can’t just spend like drunken sailors – especially as their financing costs, which are out of their control, are rising dramatically. But the Fed is talking more dovishly lately because the market has tightened for them, given the rise in rates. What I can say, without a doubt, is that something is going to break here financially. It’s not just the nominal amount of Fed policy increases. It’s the amount of doublings that’s going – we went from a funds rate of zero to 1%, then 1% to 2% then 2% to 4%” and now over 5%. “So this is going to have a massive impact on consumer spending and borrowing.”
Allan Rogers, retired and trading his own account after heading the US Treasury trading desk at Bankers Trust Corp. between 1977 and 1989
“Treasuries are oversold, but that’s only a technical trade. All I see is upward pressure on rates in just about every direction” from factors including the lack of discipline on government spending in Washington, inflation, US government interest costs and the retreat of central banks from buying new debt.
“I wouldn’t buy 10s for investment at any level under 6% or maybe 7%. They’re not cheap to me. On a fundamental basis they’ve been expensive for a very long time.”
Citigroup’s Jabaz Mathai and Alejandra Vazquez wrote in a note
“The long end of the Treasury curve continues to have poor momentum. Since the reversal of the rally” earlier this month “shorting activity seems to have picked up again. This seems to us like a classic momentum driven selloff, which makes it difficult to apply valuation anchors to gauge how far the selloff would go.”
The bank’s base case forecast is for the 10-year yield to end the year at 4.5%, while their “bear-case” forecast is at 5.15%.
Goldman Sachs Group Inc.’s chief interest-rate strategist Praveen Korapaty said in a note
“We continue to believe yields are unlikely to rise much further on a sustainable basis,” with the 10-year yield facing a challenge around 5.1%-5.25%, where it would compete with money-market yields.
“While we think current yield levels already make a compelling medium-term case for owning bonds, the value will be harder to ignore when yields no longer trade at a clear discount to cash alternatives”
Greg Whiteley, portfolio manager at DoubleLine Group LP
“It reminds you that it can take the market a while to adjust to a new environment and new circumstances. This higher-for-longer has really, finally taken hold and gotten priced in. People believe it now. Now it’s not just for the short-term, whether the Fed’s on hold for the next meeting or so, but for years to come the Fed is seen having a more hawkish stance than we’ve been used to pre-pandemic. The Fed is going to have a hard time getting inflation all the way back to 2%”
“At the same time we have huge fiscal stimulus, with CBO projections showing a shocking deficit as a share of GDP for a non-recessionary period. The surge in Treasury supply we’ve seen recently does not look like it will be going away.”
“We have stronger growth, a stronger labor market plus ongoing and very significant Treasury issuance. And the fiscal stimulus is also starting to feed into inflation expectations now, with breakevens going on the rise modestly as well recently.”
“My sense is that this is just about run its course, the rates sell off. But yields could move higher. Why couldn’t the 10-year be at 5.25%? There’s no reason it couldn’t move that high. But somewhere around here we are going to find a top, find some stability.”
This article was provided by Bloomberg News.