The 10-year treasury yield could potentially reach 5%, marking a significant shift in the market. Historically, interest rates have been decreasing since the 1980s, which has been beneficial for stocks. However, rising yields are now a concern for investors as they closely follow the movement of bond prices. Last year, a similar trend occurred, resulting in negative effects on stocks. Bruno Braizinha, a US rates strategist for Bank of America, addresses this issue in a note to clients, exploring what it would take for the 10-year yield to reach 5%. He suggests that a robust economic rebound, rather than a soft landing, is necessary to support higher yields.
Braizinha emphasizes that a significant reacceleration of the economy, coupled with a strong conviction about its outlook, would be required for a 5% 10-year yield. A softer economic landing characterized by lower inflation would instead push the yield to around 4%. Moreover, a more positive economic outlook could lead to a reassessment of the Federal Reserve’s “neutral interest rate,” potentially resulting in fewer rate cuts in the next few years. Although Braizinha considers a soft landing as the most likely scenario, he acknowledges the importance of hedging strategies for clients to mitigate potential risks associated with a 5% yield.
While Braizinha does not believe that a 5% 10-year yield is the most probable outcome, his provision of hedging scenarios to clients indicates underlying concerns. The continuous supply of Treasury debt at high levels could also contribute to the possibility of higher yields. Overall, the potential shift in the 10-year yield highlights the uncertainty surrounding the market and the need for investors to consider protective measures.