The US Treasury market is still facing significant volatility, and BlackRock strategists have issued a warning stating that the yield on the 10-year Treasury bond could reach 5%. BlackRock has been underweighting long-term US Treasuries since late 2020, anticipating higher rates in the new macro regime. While the 10-year yields have reached 16-year highs, BlackRock believes that the adjustment process is not yet complete.
Although the yield on the 10-year Treasury bond has slightly eased from its 16-year high earlier this month, it has been ticking higher again this week and is currently trading around 4.809%. This increase is attributed to the stronger-than-expected retail sales data for September. BlackRock’s strategists estimate that the impact of policy rates on yields is nearing its peak, and future yield movements will be driven by the market’s rising term premium.
Looking ahead, BlackRock’s strategists suggest that the 10-year yields could potentially reach 5% or even higher in the long term. However, in the short term, Treasury yields are expected to experience further volatility, swinging in both directions. The Federal Reserve is likely to shift away from its monetary tightening as it assesses the effects of its policy on financial conditions. The rising Treasury yields have put pressure on both markets and the economy, leading to expectations of at least one Fed rate cut by July 2024.
BlackRock also anticipates that the damage caused by rate hikes will become more apparent over time, potentially leading to pressure on the Fed to curb inflation while avoiding harm to economic activity through tight monetary policy. Other commentators, such as Phillip Colmar from MRB Partners, have warned of more potential downside in the Treasury market. Colmar predicts that the 10-year yield could surpass 5.5% in 2024, attributing this to the Fed’s history of suppressing longer-term yields with excessively optimistic inflation views.
It is clear that the US Treasury market is still in a state of flux, and investors will need to carefully navigate the constantly changing landscape of interest rates.
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