What’s the Message from Treasury Yields?

Treasury Yields Befuddle

The 10-year Treasury yield finished 2020 at 0.917% and then climbed to 1.765% before topping on March 30. The 30-year Treasury yield rose to 2.505% on March 18 after ending 2020 at 1.646%. In the January 11 Weekly Technical Review (WTR) I noted that Treasury yields had broken out to the upside and that the 10-year Treasury yield would likely climb to 1.75% to 1.95% in 2021. “Treasury yields broke out on January 6 as expectations of more fiscal stimulus and technical selling kicked into gear. At some point in 2021, the 10-year Treasury yield could spike up to 1.75% to 1.95%.”

After the 10-year Treasury yield reached 1.765% in March the consensus was that it would quickly run to 2.0%. In the April 5 WTR the expectation was that Treasury yields were more likely to fall than rise further. “After Treasury bonds experienced the largest decline in a single quarter, sentiment is even more negative according to the weekly survey by Consensus. In the last decade sentiment has only become this negative on four other occasions. This suggests that Treasury bond yields could fall for a period before the rising trend reasserts itself. In this instance the 10-year could fall to 1.50% as the 30-year drops to 2.25% at a minimum. TLT has the potential to rally to $143.00. Once this decline in yields runs its course, Treasury yields are expected to rise to higher highs in the second half of 2021.” Treasury yields did decline in the following four months and by more than expected.

What made the decline in Treasury yields all the more befuddling for Wall Street and many analysts was that it occurred against a back drop of a significant acceleration in inflation as measured by the Consumer Price Index (CPI in April, May, June, and July). Although the month over month CPI only rose by 0.5% in July, it’s still rising at a 6.0% annual rate.