Rout in 10-Year Treasury Notes Is No Wild Aberration

The rout in 10-year Treasury notes has pushed yields to the highest since 2007, with the latest bump above 4.89% coming on the heels of a strong US jobs report on Friday. What everyone wants to know now is how much further the selloff will go and how long it will last. I can venture a few educated guesses based on history.

Looking at past periods of monetary policy tightening, my main observation is that the 10-year yield tends to max out at — or slightly above — the Federal Reserve’s peak policy rate. This stands to reason because investors traditionally demand a premium for the inherent uncertainty associated with holding longer-term bonds.

Moreover, longer-term yields — which influence debt like auto loans and residential mortgages — are a key part of the monetary policy transmission puzzle, so the Fed may not see its work as done until they fall into line. Longer-term yields may move higher in anticipation of the Fed’s target rate or they may follow, as is the case this time. But one way or another, history shows that the 10-year yield needs to climb high enough to kiss the Fed’s peak rate before both can start moving in the other direction.

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  • In 1994-1995, the 10-year peaked at 8.03%; the upper bound of the fed funds target peaked at 6% about two months later.
  • In 2000, the 10-year peaked at 6.79%; the fed funds peaked at 6.5% about three months later.
  • In 2006-2007, the 10-year had a double peak at around 5.29% over about 12 months that coincided almost perfectly with the peak in fed funds at about 5.25%.
  • In 2018, the 10-year peaked at 3.24% before fed funds peaked at 2.5% about a month later.