The 10-year Treasury bond is a “screaming buy” for investors, thanks to the Fed’s success in bringing down inflation so far, according to BMO Capital Markets head of US rates strategy Ian Lyngen.
“The 10-year Treasury in my mind is a screaming buy,” Lyngen said in an interview with Bloomberg on Wednesday, pointing to a recent 15 year-record yield on the 10-year T-bill. Just a few weeks earlier, the 10-year Treasury yield hit its highest level since 2008, a sign that investors have pushed out their expectations that the Fed will soon cut interest rates.
But the 10-year yield has cooled since mid-August and traded at 4.098% on Thursday – and it’s likely to keep coming down over the coming year, Lyngen said.
That’s largely because the Fed has re-established its credibility on fighting inflation. Markets lost some confidence in the Fed’s ability to tame high prices in 2022, when central bankers were forced to go back on their original stance that higher inflation was merely “transitory.” What followed was a historically aggressive rate-hike campaign, which could have been avoided if the Fed had realized inflation was a problem sooner, critics say.
But the Fed’s war against high prices appears to have worked. Prices accelerated by 3.2% in July, down significantly from the 8.5% price growth recorded in the same month last year. Meanwhile, the Personal Consumption Expenditures price index, which is the Fed’s preferred inflation gauge, clocked in at 4.2% last month — slightly higher than the 4.1% recorded in June, but in-line with economists’ expectations.
The progress made on inflation will put pressure on breakevens, dragging the 10-year yield lower, Lyngen said. He predicted the yield on the 10-year Treasury bond could ease to 3.5%-3.75% by year-end, and ease to around 3% in the first half of 2024.
Falling Treasury yields could mean more upside for stocks, as investors will be incentivized to shift away from the bond market and back into equities.
Still, there’s a chance the 10-year Treasury could keep rising, thanks to growing concerns on the US debt level, according to market veteran Ed Yardeni. He predicted the 10-year Treasury yield could potentially surpass 4.5% this year, which could spark as much as a 10% selloff in the S&P 500.