A Historic Quiet for Rates

Treasury yields have been historically quiet this year.

As shown in the LPL Chart of the Day, the 10-year Treasury yield has bounced around in a 23-basis point (bps) (.23%) range year to date, the second-smallest range at this point in the year since 1974.

Treasury Yield Stall to Begin the Year

It may be difficult to imagine a breakout in either direction, but we expect the 10-year yield to end 2019 between 3% and 3.25%, or about 30 to 50 bps (.30–.50%) higher than where the benchmark yield is trading now.

“Long-term rates have stalled as fixed income investors reconcile sound fundamentals and moderate growth with global headwinds,” said LPL Research Chief Investment Strategist John Lynch. “The economic environment has been difficult to gauge recently, but we think sound U.S. fundamentals will prevail to lift rates slightly higher.”

The 10-year Treasury yields could climb from current levels due to:

  • Healthy inflation. Short- and long-term breakeven rates, or the difference between yields of nominal Treasuries and Treasury-Inflation Protected Securities (TIPS), have posted strong rallies to kick off the year, but yields have barely responded. We expect yields to eventually climb as growth stabilizes and inflation remains at healthy levels.
  • International demand. Treasury yields are attractive compared to other sovereign debt, and evidence of a global slowdown has increased demand for safe assets. While international demand will likely keep a cap on yields long-term, we think part of this demand will wane as trade risk subsides, weighing on prices and supporting yields.
  • Positioning. Institutional investors are speculating on lower prices (and higher yields) at a historic pace. Large speculators in 10-year Treasury futures have increased net short positioning for four straight weeks, the longest streak since October 2017.
  • Momentum. Historically, yields haven’t stayed this quiet for long. On February 20, the MOVE Index, a measure of implied (and actual) volatility in Treasury options, fell to 44.5, the second-lowest level on record.. Since 1990, when the MOVE Index has fallen below 50, the 10-year yield has risen 9 bps (.09%) over the following month (relative to an average one-month change of -2 bps or -.02%).

For more of our thoughts on fixed income, check out our Outlook 2019.

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