Ten-Year Treasury Yields Expected to Rise Further

According to Sebastien Page, Chief Investment Officer and Head of Global Multi-Asset at T. Rowe Price, the recent surge in ten-year Treasury yields will likely continue over the next two to three months. In an interview at Charles Schwab's Impact 2023 conference in Philadelphia, Page stated that he believes rates will continue to climb, indicating that they are preparing for this scenario by maintaining a cash buffer.

This year, the bond market has experienced significant volatility due to the increase in ten-year yields, negatively impacting equity valuations. FactSet data shows that the iShares Core U.S. Aggregate Bond ETF AGG, which tracks an index of U.S. investment-grade bonds, has seen a decline of 2.2% in total return so far this year. Meanwhile, the S&P 500 index SPX has risen by 10.6% over the same period.

Page identified several factors that could contribute to the upward movement of ten-year Treasury yields. These factors include stronger-than-expected economic growth, a shortage of labor supply in a robust job market, an increase in inflation expectations, and the issuance of additional Treasuries to fund the U.S. fiscal deficit. Additionally, the Federal Reserve's commitment to higher interest rates for an extended period in an attempt to curb inflation is expected to impact yields.

Despite predicting a slowdown in the economy without a recession, Page cautions against taking unnecessary risks. He maintains a neutral stance on stocks, emphasizing that now is not the time to act heroically.

Investment Outlook: Balancing Risk and Opportunity

As the Federal Reserve continues to raise interest rates, concerns about the potential lag effect on equities have led investors to exercise caution. This apprehension is rooted in the belief that higher borrowing costs will inevitably impact both consumers and businesses. Given these uncertainties, many remain hesitant to go overweight on equities.

In these volatile times, one strategy that has garnered attention is being underweight in duration in the bond market while remaining "long cash." However, some investors have found an alternative avenue for potential gains - corporate credit. With yields of approximately 9% in the junk bond market, it's no wonder why this sector has piqued interest.

Amidst these considerations, the yield on the 10-year Treasury note has experienced fluctuations. After briefly reaching its highest level since July 2007, the yield stands at 4.840%. The upward trend has investors questioning the future direction of the market.

For those seeking short-term investment options, cash-like Treasury bills offer attractive returns. With yields surpassing 5%, these ultra-short-term investments present a viable alternative. For instance, the yield on the one-month Treasury bill currently stands at 5.4%, adding to its appeal.

Despite recent market turbulence, there are signs of optimism. The U.S. stock market exhibited growth on Tuesday, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all posting gains. Nevertheless, the S&P 500's downward trend suggests the potential for a third consecutive month of losses.

Looking ahead, investors eagerly anticipate the estimate from the U.S. government regarding third-quarter gross domestic product (GDP) growth. Economists predict a significant 4.7% jump, indicative of a robust economy. Moreover, some experts project a GDP increase exceeding 2% by 2023.

As investors navigate these uncertain times, striking a delicate balance between risk and opportunity remains crucial. While remaining cautious about the lag effect of interest rate hikes, exploring diverse avenues for potential gains is key. By closely monitoring market trends and economic indicators, investors can better position themselves to seize opportunities while mitigating risks.