A selloff in government bonds has pushed the yield on the
10-year Treasury
note to its highest level in 16 years, yet investors needn’t rush to buy, some experts say.
The 10-year yield hit 4.32% on Thursday as investors digested the possibility that inflation will persist above the Federal Reserve’s target rate of 2%. In the recently released minutes from the Federal Open Market Committee’s July meeting, most committee members noted the “significant upside risk to inflation.”
The economy has remained resilient in the face of rising rates, with most investors no longer predicting a recession this year. That means the Federal Reserve won’t need to cut interest rates to stimulate the economy for some time, says George Ball, chairman of Sanders Morris Harris, a financial services firm. The past 15 years of very low interest rates have been a historic anomaly, Ball notes, and the economy can prosper at higher rates than investors have grown accustomed to.
Longer-term bond prices could fall further, and since bond prices move inversely to yields, yields may have more to rise.
“I don’t think this level of yield will break the economy, so you’ll get a better entry point,” with a higher yield, says Phillip Colmar, global strategist at MRB Partners, an investment strategy firm.
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Right now, Colmar sees more attractive opportunities in shorter-duration bonds. The two-year Treasury, for example, yields around 5.0%.
For more than a year, yields on shorter-dated debt have generally been higher than those on longer-dated securities, a pattern known as an inverted yield curve that has historicaly signaled a recession was coming. But a slowdown has yet to materialize, and the yield curve has begun to steepen, with the upward movement in longer-dated yields reducing the gap.
“We’re moving toward a normalized yield curve that we haven’t seen for a while now,” says Rajeev Sharma, managing director of fixed income at Key Private Bank.
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Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com
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