In LPL Research Outlook 2021: Powering Forward, we noted that large interest rate declines historically have been followed by reversals. With the 10-year Treasury yield continuing to climb, now’s a good time for an update. As shown in the LPL Chart of the Day, since 1990, the 10-year Treasury yield had declined at least 1.5% in a year seven times, based on quarterly data. The most recent decline was as of the end of March 2020. Will history hold true this time around?
“The previous six times the 10-year Treasury yield was down at least 1.5% in a year as of the end of the quarter, it was higher a year later every time, by an average of 0.92%,” said LPL Research Chief Market Strategist Ryan Detrick. “Well, we saw a new large decline at the end of March 2020, and while the final number won’t be in until the end of March 2021, as of last week, the 10-year yield was up again.”
While the climb in yields is consistent with history, the move so far has been slower than average, rising 0.40% since the end of March 2020 as of Thursday, January 21, 2021. But, the one-year period isn’t over yet, and rates have been steadily pushing higher. Since the start of August 2020, the 10-year Treasury yield has been climbing at a rate of about .08% each month. If rates continued to climb, we would close further on the long-term average increase, although moves over such a short time frame are unpredictable.
Extend that recent monthly pace for a year and that would be an annual increase of 0.96%. We believe rates will continue to increase in 2021 but the pace will slow over time as buyers are pulled into the Treasury market by an increasingly attractive yield, potentially limiting some of the upward momentum. Overall, we think the rate action we’ve seen so far in 2021 is consistent with our Outlook 2021 forecast of 1.25–1.75% as of year-end 2021, and we reaffirm our forecast.
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