Inflation Is Coming Down. Will Treasury Yields Be Next?
The 10-year Treasury yield has climbed steadily over the past two years. But we believe fixed-income investors should be prepared for lower yields ahead.
Treasury yields have spent the past year in a state of flux—rising and falling on mixed economic news. The 10-year Treasury yield has climbed as high as 4.3% this year, and some market observers expect it to crest at 5%. We don’t share this view. We believe Treasury yields will eventually come down, making this a potentially attractive entry point for fixed-income investors.
Why We Believe Yields Will Fall
For Treasury yields to fall, we expect to see at least one of three conditions materialize: further evidence of slowing in the US labor market; a continued deceleration in inflation toward the Fed’s target of 2%; and continued weakness in midsize US regional banks. Currently, we see evidence of all three, although this doesn’t mean we can’t see near-term volatility in rates as economic data gets released.
Borrowing costs have increased for many small and midsize businesses, and eventually business owners will need to decide whether it makes sense to continue adding headcount. As excess US consumer savings accumulated during the pandemic dissipate, the answer may increasingly be no. Despite steady but slowing job growth so far in 2023, job openings are now starting to retrench and wage growth is stabilizing (Display), which could portend a slowdown in near-term consumer spending.