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.
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.
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.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.