Analysing Recent Trends in US Treasury Bond Yields and Economic Implications

By Samir El Khoury, ACSI, ACICMP®

After reaching their highest levels since 2007 at 5.25% on October 19, 2023, for the two-year Treasury bond yield, and 5.02% on October 23, 2023, for the ten-year Treasury bond yield, both have seen a decline, currently standing at 4.90% and 4.40%, respectively. However, there are several key considerations: 

• Firstly, an inversion persists in the yield curve between the two-year and ten-year bond yields, with an approximate negative 50 basis points. This suggests the possibility of the United States entering an economic recession or experiencing a gradual decline in the coming year. 
• Secondly, despite the drop in the two-year bond yield, known for its sensitivity to the Federal Reserve’s monetary policy due to recent sluggishness in inflation and job numbers, investors are flocking to these bonds. This is amid expectations that the Federal Reserve has concluded its interest rate hikes and will shift to lowering them in the middle of the next year. However, this hasn't been confirmed by the Federal President and members of the Federal Reserve, who maintain a cautious tone. They emphasise that the battle against inflation is ongoing, with inflation still distant from the Federal Reserve's 2% target rate. This leaves room for continued bond fluctuations, with a significant likelihood of the yield surpassing the 5% threshold, pending upcoming US economic data. 
• Thirdly, the decline in the ten-year bond yield, more influenced by the US government's financial policy, remains a concern. The presence of fiscal imbalance in the United States prompts the US Treasury to persist in issuing or selling long-term Treasury bonds to finance the deficit resulting from outstanding debts. When supply exceeds demand, it puts pressure on bond prices, leading to higher yields. 

In conclusion, while there is a decrease in bond yields, the aforementioned points indicate the potential for future increases. Economic uncertainty and ambiguity regarding monetary and financial policy in the United States contribute to this outlook. 

From a technical standpoint, there seems to be robust support at a 4.80% level for the two-year Treasury bond yield. Despite attempts to break this level in five sessions, it has proven resilient. This suggests a possible rebound for the yield in the next phase. Notably, there is positive divergence observed: while yields declined, the relative strength index did not record lower levels but remained at higher levels. In the short term, this sets the stage for a rebound process, contingent on the release of economic numbers supportive of yields, albeit at the expense of bond prices. 

Please note that this analysis is provided for informational purposes only and should not be considered as investment advice.

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