History Says 10-Year Treasury Yield More Likely to Fall

Posted by Barry Gilbert, PhD, CFA, Asset Allocation Strategist

Tuesday, December 27, 2022

The 10-year Treasury yield has moved dramatically in 2022. But while the size of the move is in rare territory, it is far from unprecedented. The 10-year Treasury ended 2021 at 1.52%. The closing yield on Friday, December 23 was 3.75%, which would give us a calendar year advance to date of 2.23% (2.23 percentage points). As shown in the LPL Research Chart of the Day, that would make it one of the highest rolling one-year changes, based on data since 1963, but still below the peak one-year change in early November of 2.72 percentage points and well below the peaks seen in 1980 and 1981.

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But most investors don’t want to know where the 10-year Treasury yield has been, as interesting as it might be, but where it’s going. To get our bearings, we looked at a range of historical increases in the 10-year yield over a year and what it’s done in the following year. At a 0.5 percentage point (0.5%) move or higher in the last year, there has not been a clear historical bias toward higher or lower in the next year, but as the prior year move goes up from there, it became increasingly likely the 10-year yield would decrease in the next year, as did the average size of the decrease.

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In the territory where we are now, the 10-year yield has averaged a decline of almost a full 1% over the next year, although about 1/3 of the time it’s actually been higher. Rates aren’t on a strict clock for when extended periods of higher rates will end, but additional moves higher have tended to be muted. It’s also important to recognize that in most prior cases of moves of at least 2% the starting yield was at a much higher starting level, leaving greater scope for the size of a potential decline.

As discussed in our Outlook 2023: Finding Balance, LPL Research expects the 10-year Treasury yield to end 2023 at 3.25–3.75%, which is mostly lower from here and would be consistent with history. The economic fundamentals also likely support a steady to lower 10-year yield. The Federal Reserve (Fed) has moved aggressively to try to tame inflation, keeping inflation expectations well anchored, while pumping the brakes on the economy. On top of that, Fed rate hikes tend to act with a lag, increasing recession risks as the economy continues to try to find balance following soaring prices in 2022. Lower inflation and a slowing economy would both point to a downward bias on yields. If yields do move lower, it would help Treasuries, and higher quality bonds more broadly, rebound from a very rough 2022 and potentially provide positive returns even if the economy enters recession.


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