Treasury Yields Increase as Cash Flows Out of Bonds

On Monday, as their prices declined, Treasury rates were able to sigh with satisfaction. Prices and yields on bonds fluctuate oppositely.

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The 10-year yield increased from Friday's closing level of 3.395% to close at 3.477%.

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Treasuries have been seen as a safe haven for much of the previous two weeks with all of the turbulence in the banking sector that started with Silicon Valley Bank.

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But, Treasury yields might still move lower in the upcoming days and weeks if the turmoil surrounding the banks persists and a recession takes hold, despite Monday's respite as investors processed the announcement that UBS will save Credit Suisse in a $3.24 billion transaction.

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Treasury yields should move in a lower direction, according to Kelsey Berro, a portfolio manager at J.P. The international fixed-income group at Morgan Asset Management. The volatility in the banking sector this month, she continues, demonstrates how "high-quality bonds are performing as a portfolio diversified portfolio this year."

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Due to the Federal Reserve quickly raising the fed-funds rate in 2022, both equities and bonds suffered double-digit losses, a very unusual occurrence for just a calendar year.

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The iShares Core U.S. Aggregate Bond ETF (ticker: AGG), on the other hand, saw a total return of 2.1% this month, including interest payments, as opposed to the S&P 500's negative 0.3%.

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The managing partner of Bensignor Alternative Investments, Rick Bensignor, predicts that Treasury prices will rise and yields will fall, "washing out those who are betting against it."

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He was alluding to short sellers who are betting on a decline in bond prices.

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Bensignor predicts that the 10-year Treasury's yield, which was 3.48% on Monday afternoon, will drop to 3.2% or even 3.1%.

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In the wake of the turmoil caused by Silicon Valley Bank, Credit Suisse, and other financial institutions, he anticipates that there will be additional banks "who are going to let us understand how much problems they are on."

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According to Bensignor, "it's going to force them into the security of the bond market."

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According to Tom Tzitzouris, head of repaired strategy at Strategas, the 10-year yield will bottom out this year at about 3.25% and trade between such a level and 3.75% for the most of 2023. In the second quarter of the year, he anticipates that yield to be in the 3.25 to 3.5% range.

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A banking crisis would undoubtedly decrease this threshold, but even in that scenario, it's unclear if it would go below 3%.

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The yield on the two-year Treasury note has fluctuated much more recently than the rate on the 10-year note. On Monday afternoon, the former, which had been above 5% just weeks before the banking crisis began, was down to 3.94%, a decrease of almost 115 basis points, or 1.15 percentage points.

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In contrast, the yield on the 10-year Treasury has decreased by around 0.5 percentage points.

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The market has shifted swiftly and priced in a drastically different course for the Fed's rate hikes "in the very immediate future."

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There was talk of the Federal Open Market Committee raising short-term rates by a half-percentage point at its meeting this week before the banking crisis began. More recently, the question of whether there won't be a change or a 25-basis-point, or quarter-point, hike has become the focus of discussion.

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Nevertheless, not everyone thinks that Treasury yields will decrease.

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The Federal Reserve is anticipated to announce a term is used to refer rate increase on Wednesday, according to Jason Pride, the head of investments for private wealth at Glenmede.

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When the Fed does start to reduce short-term rates, bond prices should benefit as existing returns will be more alluring than alternate options like newly issued bonds.

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Pride, though, asserts that "I don't think they are as close to slashing rates as the market seems to assume."

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Interest rate fluctuations continue to be unpredictable, as Berro of JPMorgan Chase Asset Management reminds out. Yet, in her opinion, "the Fed's direction is clear—they are done" (or "quite close to being done") with rate rises.

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That could result in further lower yields for many bonds, which would be good news.