Will The 10-Year Treasury Yield’s Recent Rebound Continue?

The benchmark rate on the 10-year Treasury has been trending higher since October, suggesting that the sharp slide that unfolded earlier in 2019 has run its course. But the economic outlook is still sufficiently murky to reserve judgment on whether the latest bounce in this key yield is a limited revival after an arguably excessive slide or the start of a sustained rise.

In the realm of what we do know for certain: It’s clear that the strong downside bias that was in force through 2019’s third quarter ran out of steam in October. In the months since, a modest upside trend is conspicuous. Notably, for the first time in 2019 the 10-year yield’s 50-day average rose above the 100-day average in December. That’s a clue for thinking that the rate could continue to increase, especially if the trend survives to lift the 50-day average over the 200-day average at some point in the weeks ahead.

Note, too, that inflation expectations have turned up lately, based on the yield spread between nominal Treasuries rates and their inflation-indexed counterparts. For the 10-year maturities, the market’s current guesstimate is 1.75% (as of Jan. 8), which reflects a modest increase in the inflation outlook vs. the roughly 1.50% forecast that prevailed at one point in October.  If the crowd’s mildly firmer reflation expectations roll on, the trend will support higher interest rates generally.

The official inflation data, however, still implies that the 2% inflation trend, give or take, will hold, perhaps with a modest firming in the near term (as suggested by Consumer Price Index numbers of late). With a clear upside bias that lifts core-CPI’s one-year change closer to 3%, it’s reasonable to assume that the Treasury market’s rebounding inflation expectations will moderate. But it’s not yet obvious that CPI is headed to 3% any time soon.

On the other hand, the technical profile for the 10-year yield suggests that there’s more upside ahead. Yet the question is whether the economic data will play along? On this front the outlook has turned a bit cloudy. Although the US economy is on track to report a moderate expansion in the upcoming fourth-quarter GDP report, the slowdown in last year’s second-half remains intact.

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