December 12, 2023
After rising for much of the year, US Treasury bond yields saw a large decline in November. 10-year Treasury bond yields briefly touched 5% in the middle of October before dropping to 4.3% by the end of November. In fact, the price of 10-year Treasury bonds saw the largest monthly rise since late 2008. As a reminder, when interest rates fall, bond prices move higher. We continue to expect bond yields to move lower.
The 10-year bond yields tend to follow a certain pattern throughout the economic cycle. As the economy begins to accelerate and inflation starts to rise, yields increase in anticipation of future interest rate hikes by the US Federal Reserve (Fed). Toward the end of the cycle, the Fed usually raises interest rates so much that it triggers a recession, causing bond yields to fall before the recession begins. Yields continue to fall through the recession, ultimately finding some stability after the end of the recession, at which point yields bounce around until the process starts over. We should note that this pattern did not hold in the 1970s and early 1980s, when inflation expectations were rising, pushing rates higher. However, we believe yields should follow the typical pattern outlined above since inflation expectations are currently under control.
Why is this important? We have been anticipating a recession, and the recent move lower in 10-year bond yields fits with the pattern discussed above. If our recession call comes to fruition, we believe that bond yields have much further to fall.
10-year US Treasury bond yields
January 1, 1986-November 1, 2023
Note: Shaded areas of chart indicate recessionary periods.
Sources: Macrobond, US Department of the Treasury.
Chart is for illustrative purposes only.
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