Since early December 2021, barely three months ago, the US Treasury market has been hammered as it’s slowly dawned that consumer price inflation isn’t going away on its own.
In terms of commonly cited yields, the ten year note has risen from 1.35% to 2.32% as of yesterday. In the interest of facilitating comparison with other asset classes, let’s look at price. An index of Treasuries of 10-30 years maturity, as tracked by VGLT, is down over 14.7%. That’s a pretty steep loss for an asset class normally associated with safety. Heck, that size of decline even prompts hand-wringing in stock markets these days. Yet from its August 2020 highs, the decline is even deeper at 24.3%.
Now to what we really care about: Where does it go from here? The ten year yield will peak this year in the 3% area. This basically would undo the head and shoulders bump since the fall of 2018. A 5-10 year chart of GOVT shows this clearly. An overshoot to around 3.5% is possible, but a pause in the 3% area is more sustainable. Synthetic Systems sees the bottom in prices coming late third to early fourth quarter, possibly after an intervening rally. But yields in that range ultimately provoke systemic stress, leading equites to enter a bear market and bonds to enter a bull market. This also breaks the inflationary cycle in commodities. We can refine that outlook with the next SS update, due around April 1.
The bigger point though is that as dismal as the outlook for bonds in general and Treasuries in particular looks right now, in terms of price the current bear market appears closer to the bottom than the top.