U.S. Treasury Yields Hit Highest Level in Decades ... Wall Street Weighs When to "Buy the Dip"

10-year Treasury yield hits 5.24%
Major investment banks: "More attractive as an investment"
Caution persists despite optimism for a price rebound

With the yield on 10-year U.S. Treasury bonds surging to its highest level in decades, Wall Street investors are divided in their outlook. Some are optimistic, arguing that yields have fallen to attractive levels and that it is time to invest. Others urge caution, saying that inflationary pressures stemming from structural factors, including the boom in artificial intelligence (AI) investment, remain in place.

According to Bloomberg News on October 12 (local time), the U.S. Treasury cash market was closed that day for Columbus Day. As of the previous trading day, October 9, the 10-year yield stood at about 5.24%, while the 2-year yield was 4.8%. The 10-year yield briefly climbed to 5.37% during trading on October 7, reaching its highest level in 24 years, before easing slightly. It remains elevated. Bond yields and prices move in opposite directions.

BlackRock Ends 6-Year Underweight Position in U.S. Treasuries

Wall Street's views on bonds have diverged. Major investment banks, including Goldman Sachs, Morgan Stanley and Citigroup, said in recent reports that U.S. Treasuries have become more attractive investments. Optimists generally concluded that, given economic fundamentals and other factors, markets have overestimated the likelihood of further tightening in the U.S. Federal Reserve's (Fed) monetary policy outlook.

Goldman Sachs cited easing concerns in credit markets and reduced technical selling pressure as reasons to expect a rebound in 10-year Treasury prices. Goldman Sachs strategists said, "Long-term forward rates have risen above fair value, and several factors support the appeal of duration investments." Duration refers to how sensitive a bond's price is to changes in interest rates.

Morgan Stanley also considers current yields attractive. It forecasts that if nominal economic growth averages 4% to 5% annually over the next 10 years, the 10-year yield could stabilize in a range of 3.5% to 4.5%. However, it recommended waiting until after this month's Federal Open Market Committee (FOMC) meeting and next month's midterm elections before investing. Citigroup is focused on near-term interest rate stability, noting that "the current 2- to 3-year segment is where clients want to stay to avoid risk."

BlackRock, the world's largest asset manager, has also ended its strategy of underweighting U.S. Treasuries, which it had maintained for about six years. It upgraded short-term Treasuries to "overweight" and long-term Treasuries to "neutral." BlackRock said it was making the change because "Treasury yields have reset to the high levels we had expected" and that it was "seeking to lock in attractive income."

"High-Rate Environment Could Persist"

The logo of OpenAI's generative AI chatbot ChatGPT. Reuters-Yonhap News

By contrast, cautious investors worry that robust U.S. economic growth and funding demand driven by competition for investment in the AI industry could prolong the high-rate environment. Bank of America (BofA) said markets are underestimating the possibility of further Fed rate hikes. Barclays also warned that while Treasuries have become more attractive, the risk of losses from further rate increases remains.

UBS, which maintains a "neutral" outlook on U.S. Treasuries, said yields "appear high relative to fair value," but also highlighted economic growth and the risk of rising oil prices. Canada's Bank of Montreal (BMO) likewise sees a possibility that increased AI investment could push up the long-term neutral interest rate.

Markets see U.S. inflation data due this week as a key factor in determining the bond market's near-term direction. The September Consumer Price Index (CPI) will be released on October 14, followed by the Producer Price Index (PPI) on October 15. Wall Street expects core CPI, which excludes food and energy, to rise 0.2% from the previous month, slowing from 0.3% the month before. However, if inflation comes in higher than expected, concerns about further Fed tightening could grow.

Futures markets widely expect the Fed to hold rates steady this month. According to CME FedWatch, as of October 12, markets were pricing in a 79.5% probability that the Fed would leave its benchmark interest rate unchanged at the current range of 3.75% to 4.00%. That was slightly lower than the 82.3% probability priced in the previous day. Since taking office, Fed Chair Kevin Warsh has said he will focus on underlying inflation trends and broad-based price data rather than any single indicator.

This content was produced with the assistance of AI translation services.