By Tim Courtney, Chief Investment Officer
Over the past couple of years, the 10-year Treasury yield, a benchmark that impacts a variety of consumer borrowing costs, has taken us on quite a ride. After being near 0.50% in the fall of 2020, it ended 2021 at roughly 1.5%1 and then began a rapid rise. Over the last nine months it hit 2.5%, 3.5% and at the end of September, topped 4%, a record increase in such a short time span.2 Since the start of October we’ve seen volatility, with it dropping from 4% to 3.6% and jumping back to 4.0%.3 The fast-moving 10-year yield is creating a ripple effect across the economy.
If 2022 were to end today, this would be the worst annual bond return in the last century.4 With central banks around the world moving to curb inflation, the U.S. Aggregate Bond ETF is down 15% this year with global bonds down even more. 5 This is painful, no doubt, but there are positives to identify during this time. Home prices, one of the areas the Fed was concerned most about, are coming down from historic highs. In addition, bond investors now have higher expected returns in the 4-5% range.6
The rising 10-year yield is also a sign that markets are pricing in prolonged policy tightening. For a large part of 2022, the markets behaved as though inflation and rate hikes were transitory and things would return to normal rather quickly. That wishful thinking has ended. The Fed seems to be acknowledging that keeping interest rates near 0% was short-sighted and heavily influenced the elevated inflation we’ve experienced this year. With that acknowledgment, though, comes their attempt at a correction, which carries its own risks.
Keeping rates near zero was bad, but after undergoing one of the fastest rate hikes in history, talk of potential repercussions has increased. Fear of recession is growing as the Fed has stated its intention to continue to raise rates to battle high inflation.7 However, pressure will also mount from markets, industry leaders and government officials if the Fed’s corrective actions begin to cause meaningful economic damage.8
Uncertainty looms in the future, but it seems as though inflation may have peaked. Even if that is the case, inflation is still likely to remain elevated and well above the Fed’s 2% target. We also think that the Fed may not be as hawkish as they claim. No entity is truly independent after all, and pressure to slow the pace of increases will build if economic numbers deteriorate meaningfully. If you have any questions or concerns, please reach out to your Exencial Advisor.
- CNBC.com (12/31/21) – U.S. 10-year Treasury yield finishes 2021 above 1.5%
- The Wall Street Journal (9/28/22) – Global bonds rally after 10-Year Treasury Yield touches 4%
- CNBC.com (10/7/22) – 10-year Treasury yield pops after September jobs report
- Forbes (10/5/22) – With the worst US bond returns in history, where did investors go wrong?
- New York Times (10/12/22) – Turmoil returns to the U.K. bond market
- Bloomberg (10/12/22) – Why questions are swirling about who will buy most of the US $31 trillion in debt
- Bank Rate (9/30/22) – How much will the Fed raise interest rates in 2022? Here’s what experts are saying
- Bloomberg (10/10/22) – Powell set to rebuff pressure on Fed as finance chiefs meet
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