June 20, 2024

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Treasury yields are surging. Here’s what history says might come next for the bond market.

2 min read

History suggests that bond yields aren’t actually that high, compared to prior decades.Michael M. Santiago / Getty

  • The yield on the 10-year Treasury is hovering close to 5%, the highest level in 16 years.

  • Strategists at Barclays this week said Fed policy isn’t even very tight and rates won’t fall soon.

  • Here’s what history says about the rise in US bond yields and where Treasurys may be headed next.

Investors have been dumping US government bonds as the market adjusts to the outlook of interest rates being higher for longer.

The Treasury sell-off that started in early October has ranked among the worst crashes in market history, and as recently as Friday the yield on the 10-year Treasury touched 5% for the first time since 2007.

Despite the panic in markets, trends from decades past suggest that yields are pretty much right in line with expectations for the economy over the medium-term.

Christoph Schon, senior principal of applied research at market data and intelligence firm Qontigo, told Insider that a 10-year yield at 4.7%-5.1% looks appropriate relative to the current long-term inflation expectations, which stand at about 2.45%.

During the 1980s and 1990s, he explained, the 10-year Treasury yield was roughly two times inflation expectations, represented by the 10-year breakeven inflation rate. At the time, investors could expect real returns that matched the expected rate of inflation.

It took the dot-com bubble and 2008 financial crisis to shift this, however, and Treasurys became assets where investors could park cash while the stock market went through a long period of volatility.

“Stock and bond prices started to move in opposite directions, complementing each other depending on risk appetites,” Schon said.

He added that the recent surge in consumer prices with the pandemic and Russia’s invasion of Ukraine has meant stocks and bonds are correlated once again, with both assets selling off in tandem amid a sharp rise in interest rates.

“Our argument is that the current…

2023-10-21 16:30:02

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