Despite strong market gains on Wednesday, March 4, 2020, the on-the-run 10-year Treasury yield ended the day below 1% for the first time ever and has posted additional declines in real time, sitting at 0.92% intraday as this blog is being written. “The decline in yields has been remarkable,” said LPL Research Senior Market Strategist Ryan Detrick. “The 10-year Treasury yield has dipped below 1%, and today’s declines are likely to make the recent run lower the largest decline of the cycle.”
As shown in LPL Research’s chart of the day, the current decline in the 10-year Treasury yield without a meaningful reversal (defined as at least 0.75%) is approaching the decline seen in 2011 and 2012 and would need about another two months to be the longest decline in length of time. At the same time, no prior decline has lasted forever and a pattern of declines and increases has been normal.
What are some things that can push the 10-year Treasury yield lower?
- A shrinking but still sizable yield advantage over other developed market sovereign debt
- Added stock volatility if downside risks to economic growth from the coronavirus increase
- A larger potential premium over shorter-term yields if the Federal Reserve aggressively cuts interest rates
What are some things that can push the 10-year Treasury yield higher?
- A second half economic rebound acting a catalyst for a Treasury sell-off
- As yields move lower, investors may increasingly seek more attractive sources of income
- Any dollar weakness could lead to some selling by international investors
- Longer maturity Treasuries are looking like an increasingly crowded trade, potentially adding energy to any sell-off
On balance, our view remains that the prospect of an economic rebound over the second half points to the potential for interest rates moving higher. At the same time, we still see some advantage in the potential diversification benefits of intermediate maturity high-quality bonds, especially during periods of market stress. We continue to recommend that suitable investors consider keeping a bond portfolio’s sensitivity to changes in interest rates below that of the benchmark Bloomberg Barclays U.S. Aggregate Bond Index by emphasizing short to intermediate maturity bonds, but do not believe it’s time to pile into very short maturities despite the 10-year Treasury yield sitting at historically low levels.
IMPORTANT DISCLOSURESThis 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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.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.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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.This Research material was prepared by LPL Financial, LLC.Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.If your representative is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union.These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:Not Insured by FDIC/NCUA or Any Other Government AgencyNot Bank/Credit Union GuaranteedNot Bank/Credit Union Deposits or ObligationsMay Lose Value For Public Use | Tracking # 1-960903