With the Fed ramping up its rate hikes, investors are wondering where this will all end. Certainly, Powell & Co. have been moving the goalposts in that regard, with their latest dot plot revealing a median terminal Federal Funds Rate target of 3.80% in 2023, a full percentage point from what was estimated in March. This has become a moving target, which makes projecting where the U.S. Treasury (UST) 10-Year yield may end up a challenging endeavor.
While the overarching trend thus far in 2022 has been for the UST 10-Year yield to move to the upside, recent trading action has underscored the volatile nature of the bond market. After approaching 3.20% in early May, the 10-Year quickly reversed course and fell nearly 50 basis points (bps) toward the end of the month, to just above 2.70%. Then, last week investors witnessed a renewed surge northward, as the yield was knocking on the door of 3.50%.
U.S. 10-Year Fibonacci Chart
Naturally, the question remains whether a top has been reached. However, after looking at technical analysis, the rise in the UST 10-Year yield may not be over just yet. According to the closely followed Fibonacci retracement levels, this most recent move to the upside broke through the longer-term level of roughly 3.41%. As the enclosed graph reveals, there is now nothing between this aforementioned reading and the next retracement level of 4.14%.
Now, I’m not projecting that the 10-Year is about to break through the 4% barrier at this time. But the lack of any support levels before this threshold does create quite the conundrum. As we’ve discussed in some prior blog posts, watching developments from a real yield perspective could help determine where the nominal UST 10-Year yield could go as well. Thus far, it has worked quite well. During the current run-up of close to 3.50%, the 10-Year Treasury Inflation-Protected Securities (TIPS) yield surged by 75 bps, or nearly identical to the increase for the UST 10-Year. In fact, after being in the negative column as recently as late April, the 10-Year TIPS yield rose to as high as 0.83% before settling in at 0.64% as of this writing. Interestingly, this yield is still about 50 bps below the peak registered in 2018 during the last Fed rate hike cycle.
Barring a collapse in the economic data or a stock market meltdown, investors may look to the technicals and real yields for guidance on where that elusive top will be for the UST 10-Year yield. In my opinion, another test and potential overshoot of the 3.50% level seems distinctly possible.
Originally Posted June 22, 2022 – Is a 4% Treasury 10-Year Yield Possible?
Disclosure: WisdomTree US
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this and other important information, please call 866.909.WISE (9473) or click here to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing, including the possible loss of principal. Past performance does not guarantee future results.
You cannot invest directly in an index.
Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please see prospectus for discussion of risks.
WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from WisdomTree US and is being posted with permission from WisdomTree US. The views expressed in this material are solely those of the author and/or WisdomTree US and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.