In a recent selloff of government bonds, the yield on the 10-year Treasury note has reached its highest level in 16 years, causing some experts to advise caution. On Thursday, the 10-year yield reached 4.32% as investors weighed the possibility of enduring inflation above the Federal Reserve’s target rate of 2%. The Federal Open Market Committee’s minutes from their July meeting revealed that most members acknowledged the “significant upside risk to inflation.”
Despite the rise in rates, the economy has proven to be resilient, and the majority of investors no longer anticipate a recession this year. Consequently, there is no immediate need for the Federal Reserve to lower interest rates in order to stimulate economic growth. George Ball, Chairman of Sanders Morris Harris, a financial services firm, asserts that the past 15 years of unusually low interest rates were an anomaly, and the economy can thrive with higher rates than what investors have become accustomed to.
It is possible that longer-term bond prices may further decline. Since bond prices move inversely to yields, this suggests that yields may continue to rise. Recognizing this, Phillip Colmar, Global Strategist at MRB Partners, recommends considering shorter-duration bonds as they currently present more attractive opportunities. For instance, the two-year Treasury yields around 5.0%.
For over a year, yields on shorter-dated debt have generally exceeded yields on longer-dated securities—a phenomenon known as an inverted yield curve that typically predicts an imminent recession. However, despite this pattern, a slowdown has yet to materialize, and the yield curve has begun to steepen, with longer-dated yields on the rise.
Rajeev Sharma, Managing Director of Fixed Income at Key Private Bank, states that we are gradually moving towards a normalized yield curve, which has been absent for some time now.