The 10-year U.S. Treasury yield has hit its highest level in 16 years, but a host of economists and money managers and investors expect it can go still further. The yield on the benchmark Treasury peaked out at 4.754% on Tuesday, its highest since August, 2007, and up from 4.0% as recently as August 9, less than eight weeks ago. The move up on Tuesday came after August’s job openings survey showed a spike in employment vacancies, another sign the labor market remains drum tight in spite of the Federal Reserve’s 18-month-long effort to cool the economy. Treasury yields have surged in the past month as traders accepted that the central bank will likely keep its base lending rate higher-for-longer to cap inflation, and as the federal budget deficit threatened to flood the market with Treasury securities that will swamp demand. The problem is that, even with the backup in yields that’s already happened, many market participants say the 10-year could climb further — though they differ on when that will happen and how high they’ll go. “The supply and demand of bonds is going to balance but the only question is at what interest rate,” said economist Ed Yardeni, president of Yardeni Research. “And there are some sizable Treasury auctions coming that’ll test that.” Getting close to the ‘pain point’ Wolfe Research macro strategist Rob Ginsberg expects yields will top out between 5% and 5.25% before “something starts to break,” spurring a flight to safety in bonds. He expects macroeconomic concerns or other signs of stress could eventually lead to a dovish pivot from the Fed that drives bond prices higher and yields lower. “Pain in the near term is still to the upside [in yields] but then I think we probably reverse it,” Ginsberg said. Whenever that happens, “I think we kind of stall out at 5.25% and then pull back,” Ginsberg said. “We’re getting close to that pain point that will force people to buy bonds now,” he added. If the 10-year yield broke out convincingly above 5.25%, Ginsberg said it could next move above 7% — although he’d be “shocked” to see yields that high. He assumes that even a 10-year yield above 5% will cause something to go wrong in one corner of the market or the economy. He cited weakness already present in the small cap indexes such as the Russell 2000, which is down 2% this year, as well as the poor breadth in the major stock indexes outside of the mega-cap tech companies such as Apple or Nvidia. A seasonal rebound Similarly, Katie Stockton, a managing partner at Fairlead Strategies who focuses on price charts, expects the 10-year Treasury yield could test its 2006-2007 highs — around 5.25% — after recently breaking out above its 2022 high, around 4.34%. However, she doesn’t expect the level to be tested anytime soon. In fact, she said there could be consolidation in bond yields within the next couple of weeks, citing signs of exhaustion in short-term overbought and oversold indicators. “The signs of exhaustion may be worked off in a fashion where, rather than going down, yields actually maybe just go sideways,” said Stockton. “But even sideways, I think, would be welcomed by investors as just a bit of a break in the acceleration that we’ve seen to that side.” The technical analyst expects that sideways movement could boost equities just in time for an end-of-year rebound — so long as there isn’t a breakdown of support for the S & P 500 around the 4,200 level. “We’re looking for a seasonal rebound,” Stockton said, noting that weakness in September “often gives way to relief rallies in October, November, so that would be natural.” “Where we would feel less convinced is of course if we saw [the S & P 500] break down below support” around 4,200, Stockton said. Wolfe Research’s Ginsberg also expects investors could see a counter-trend rally that would itself be brought about by a crack in an asset class and a fast capitulation. Under that scenario, 10-year yields could fall all the way back to around the 3% level in early 2024 but, until then, he advised investors to hold onto their cash, and stay a little conservative. “It’s gonna be a challenging environment for investors, for stock investors,” Ginsberg said. “This is no time to be a hero. That’s the way I like to think of it. And then, when we get the fever breaking in rates and the U.S. dollar, and things start to get oversold, then maybe we have something. For now, I think you’re going to want to be a little conservative.” Other risks Ed Yardeni expects the debt crisis scenario outlined by investors such as Bridgewater Associates’ Ray Dalio could be “realistic” if yields go higher, to between 5% and 6%. “The risk is that I think if we start seeing the 10-year somewhere between 5% and 6%, I think things will start to break in the credit system and that would certainly increase the risks of a recession,” Yardeni said. However, he expects the 10-year yield could stabilize around 4.5% and 5%. “I think inflation is going to continue to come down and make those kinds of yields look really quite attractive,” he said.
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