The yield on the benchmark 10-year Treasury has tumbled yet again, as safety-seeking investors crowd into the bond. On Friday, as the price on the 10-year mounted, its yield slid to 1.51%.
You think that’s low? The Treasury note could descend to between 0.5% to 1% in a recession, according to Moody’s Capital Markets Research. “Treasury bonds are likely to set new multi-decade and possibly new record lows within five years,” wrote John Lonski, the unit’s chief economist.
With the latest federal funds rate of 1.87%, such a drop for the 10-year is entirely possible, he reasoned. The Federal Reserve is expected to lower the rate another quarter-point soon. While short-term rates and long-term ones are affected by different dynamics, such a move would still put downward pressure on the 10-year.
The biggest factor is the overwhelming popularity of the 10-year as a haven, since the US is presumed incapable of default on its debt obligations. For bonds, prices move in the opposite direction from yields.
The most recent low was 1.48% on August 28. The yield rose to 1.9% in early September amid optimism over resolving the trade war between the US and China. With the scotching of those hopes, the yield began its latest tumble.
Lonksi cast doubt on a hardy cadre of fixed-income investors who think that Treasury bonds are in a bubble. This group believes that, if the US avoids a recession and begins growing economically, today’s crop of Treasury fans will suffer as bond prices sink. “History warns us,” he said, “that such an assumption borders on the heroic.
A more likely hypothesis for the 10-year’s future: Look out below.