By
Bena Ilyas
March 25th, 2024
Since 2007, the 10-year Treasury Yield has struggled to reach its long-term average of 4.5%.
The 10-year US Treasury yield, a critical indicator of economic health, has reached a significant milestone. For the first time since the Global Financial Crisis (GFC) of 2008-09, it has risen back to the 4.5% yield. This development has brought optimism to long-term Treasury investors, offering the prospect of positive annual real yields, especially with inflation moderating.
A Return to Historical Norms
The 10-year US Treasury yield’s resurgence to 4.5% marks a return to its long-standing historical average. This rate has served as a benchmark for the bond market and has been a reliable gauge of economic conditions for over 200 years.
A notable aspect of this milestone is that the 10-year yield now comfortably surpasses the annual US inflation rate. As of August, inflation was measured at 3.7%. This means that investors in 10-year Treasury notes can earn a positive annual real yield, provided that inflation remains relatively stable.
This positive real yield is a welcome development for investors who have grappled with the challenges of low yields in recent years, often struggling to keep pace with rising living costs.
The 10-year US Treasury yield is not only significant for bond investors but also plays a pivotal role in determining mortgage rates. Mortgage rates often follow the trajectory of the 10-year yield, making it a crucial factor for homebuyers and the housing market as a whole. The recent rise in the 10-year yield could translate into slightly higher mortgage rates, potentially impacting the affordability of homeownership.
A Decade of Low Treasury Yields
Since 2007, the 10-year Treasury Yield has struggled to reach its long-term average of 4.5%. The aftermath of the GFC prompted the Federal Reserve to implement a policy of low interest rates to stimulate economic recovery.
This led to a prolonged period during which investors found limited appeal in Treasurys for their yield potential. With only brief exceptions in December 2013 and October 2018, the 10-year Yield remained below 3% for an extended 11-year span, from mid-2011 to mid-2022.
During this era of historically low interest rates, annual inflation typically ranged from 1% to 3%, except for a brief dip to 0.1% in 2015. Investors faced a challenging investment landscape with Treasurys offering little in the way of positive real yields. This was especially notable during a period of rising global stock markets, where equities appeared more attractive in terms of returns.
However, the dynamics of the financial landscape have shifted with the recent rise in nominal rates. The Federal Reserve responded to post-pandemic inflation concerns by pushing its benchmark rate to levels not seen in two decades. This effort aimed to control inflation, which surged to levels not witnessed in 40 years.
As it stands, investors now find themselves in a position where they can consider Treasurys not just as a means to reduce portfolio risk but as a compelling cash-producing alternative to other asset classes.