The 10-year US Treasury yield has reached a significant milestone, returning to its long-term average of 4.5% for the first time since the Global Financial Crisis of 2008-09. 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, which has served as a benchmark for the bond market and 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, which was measured at 3.7% as of August. 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 struggled with 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 Global Financial Crisis 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 Treasuries 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 Treasuries 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, in an effort to control inflation that surged to levels not witnessed in 40 years.

As it stands, investors now find themselves in a position where they can consider Treasuries not just as a means to reduce portfolio risk, but as a compelling cash-producing alternative to other asset classes.

FAQs

1. What is the historical average for the 10-year US Treasury yield?

The historical average for the 10-year US Treasury yield is 4.5%.

2. How does the 10-year US Treasury yield affect mortgage rates?

The 10-year US Treasury yield plays a pivotal role in determining mortgage rates. Mortgage rates often follow the trajectory of the 10-year yield, so a rise in the yield could lead to slightly higher mortgage rates, potentially impacting the affordability of homeownership.

3. Why did the 10-year US Treasury yield remain below its historical average for a prolonged period?

The 10-year US Treasury yield remained below its historical average for a prolonged period due to the Federal Reserve’s policy of low interest rates implemented after the Global Financial Crisis to stimulate economic recovery.

4. Why is the recent rise in the 10-year yield significant?

The recent rise in the 10-year yield is significant because it offers the prospect of positive annual real yields to long-term Treasury investors, especially with inflation moderating. This is a welcome development after several years of low yields.

Summary

The 10-year US Treasury yield has returned to its historical average of 4.5% for the first time since the Global Financial Crisis. This marks a significant milestone and brings optimism to long-term Treasury investors. The rise in the 10-year yield also has implications for mortgage rates and the affordability of homeownership. After a decade of low Treasury yields, the recent increase in nominal rates has made Treasuries more appealing to investors as a cash-producing alternative to other asset classes.