10-Year Treasury Yield Hits 3% for First Time Since 2018

The worst bond trail in decades hit a new milestone on Monday, with yields on 10-year Treasuries hitting 3% for the first time since late 2018.

Yields on the benchmark 10-year Treasury note, which rose as bond prices fell, surged at the start of U.S. trading and hit as high as 3.008% in the afternoon, as traders braced for the end results of the Federal Reserve meeting this week. It then dropped below 3% to settle at 2.995%, according to Tradeweb,

up from 2.885% on Friday.

A reference for borrowing costs on everything from mortgages to student loans, yields last closed above 3% in November 2018 and have skyrocketed from 1,496% at the end of last year. .

Prices of corporate bonds, corporate bonds and municipal debt have fallen this year in the face of Fed rate hikes in an effort to contain inflation. The Bloomberg US composite bond index – largely US Treasuries, highly rated corporate bonds and mortgage-backed securities – has returned negative 9.5% this year since April 29th.

“It’s been a pretty rough couple of months,” said Nick Hayes, head of gross income and fixed income asset allocation at AXA Investment Managers.

The yield on a bond primarily reflects an investor’s expectations for short-term interest rates over the life of the bond. Rising yields are often associated with a strong economy because faster growth and tighter labor markets can lead central banks to reduce inflation.

In this case, the labor market is extremely tight and inflation is running at its fastest pace in decades, prompting the Fed to signal a series of rapid rate hikes and triggering a recession. The rally in yields sent shock waves through the markets.

Zachary Griffiths, senior macro strategist at Wells Fargo, said investors are unlikely to get much relief until inflation fears ease, a wild sign given the coronavirus outbreak. in Asia are putting pressure on global supply chains, and the war in Ukraine is driving up commodity prices..

“There is a lot of uncertainty regarding inflation, monetary policy, geopolitics. “Even if the Fed has signaled that it will tighten significantly, it still doesn’t seem to have really lowered inflation expectations, not for the long term.”

The inversion of the US Treasury yield curve has been seen as a warning sign of a recession for decades, and it looks like it’s about to brighten again. WSJ’s Dion Rabouin explains why an inverted yield curve can be so reliable in predicting a recession and why market watchers are talking about it now. Illustration: Ryan Trefes

Fed officials raised interest rates by a quarter of a percentage point in March. Minutes of the Fed’s latest policy meeting showed the central bank could raise interest rates by half a percentage point on Wednesday and begin to reduce its $9 trillion asset portfolio. That may come as a surprise to some in the market, said Griffiths, who expected a less aggressive pace.

According to Ryan ALM & Tradeweb ICE, 10-year Treasury yields have been higher than 3% for most of the past half-century, surpassing 15% in the 1980s, according to Ryan ALM & Tradeweb ICE. But over the past decade, they have only ended the day above 3% 64 times, reflecting a period that until recently was marked by sluggish growth and inflation.

While today’s bond yields remain low by historic standards, they still represent a significant change from the early days of the Covid-19 pandemic, when 10-year yields fell. as low as 0.5%.

Investors then have no reason to worry about rate hikes. Not only leaving the economy in a precarious position, Fed officials are also re-evaluating the way they conduct monetary policy, pledging to be more cautious in raising interest rates after years of mostly flat inflation. remain below the 2% annual target.

Yields began to rise in late 2020 due to the development of an effective Covid-19 vaccine, and got another boost as Democrats took full control of Congress, setting the stage for stimulus measures. prefer finance.

However, the 10-year yield topped out at around 1.75% early last year, and for most of 2021 has been tapering off even as inflation starts to pick up. Fed officials reassured that inflation was largely temporary, with investors anticipating only a few quarter-percent rate hikes in 2022 at the end of December.

Since then, however, bonds have failed as inflation has remained high, and analysts have continued to focus on their expectations of a rate hike – raising this level every time Treasury prices in the next few months. previous most positive forecast.

As it stands, interest rate derivatives suggest investors expect the Fed to raise the benchmark federal funds rate from its current level of 0.25% to 0.5% to just above 3% next year. .

That suggests a long way ahead in which many factors in the economy could malfunction, including further declines in riskier assets like equities, giving the Fed pause. its tightening efforts. Now, soaring yields have led to significantly higher consumer borrowing costs — with 30-year mortgage rates rising above 5% — and contributed to a stock slump that sent the S&P 500 index lower. about 13% during the year.

However, many analysts say lending rates may have to move higher than 3% to bring inflation down, suggesting a bond sell-off could still be a possibility.

One point made by analysts is that inflation expectations over the next decade remain high, even if the Fed is expected to tighten. That means real or inflation-adjusted Treasury yields remain low by recent historical standards, potentially providing an incentive for businesses to borrow and invest despite the benefits. nominal interest rates increased sharply.

The yield on inflation-protected securities on 10-year Treasuries – a proxy for real yields – stood at around 0.16% Monday afternoon, according to Tradeweb. This is up from negative 1.11% at the end of last year but is still far below the near 1.2% they reached at the end of 2018.

Write letter for Sam Goldfarb at sam.goldfarb@wsj.com and Heather Gillers at heather.gillers@wsj.com

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Edmund DeMarche

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