Are Long-Term Rates Setting Up for a Huge Move?

Posted by lplresearch

Friday March 11, 2022


Consumer inflation hit a 40-year high according to data released yesterday; however despite the increased levels of inflation, interest rates have stayed stubbornly low. In fact, despite rising about 26 basis points (0.26%) since the beginning of March, the yield on the 30-year US Treasury is basically unchanged over the past year. But could all that be about to change? Our technical analysis says yes.

As shown in the LPL Chart of the Day, a more long-term look at 30-year Treasury rates appears to show a base three years in the making. Not only that, but yields are currently closing in on a breakout that would target a move towards 4.0%, a level that hasn’t been seen since late 2013.

“Investors have been conditioned to think that interest rates can only go lower,” said LPL Financial Technical Market Strategist Scott Brown. “However, we have seen these large bases in long-term sovereign yields resolve higher in multiple other countries including Germany and Japan so far this year, and it appears that the US could be next.”

We believe this may be one of the most overlooked stories in the market right now. The Bloomberg average economist forecast sees the 30-year yield ending the year at just 2.58%, less than 20 basis points above current levels. This complacency shows that investors may not be positioned for such a move, acting as a contrarian tailwind in our view.

To be clear, we are not saying that it would be a straight line to 4% or that we may even see that level in 2022. However, bonds are already under pressure this year with the Bloomberg Aggregate Bond Index down more than 4% and on track for consecutive negative yearly returns for the first time ever. A decisive move up above 2.5% for the 30-year yield may seal that fate and we would recommend investors keep fixed income interest rate sensitivity below benchmark levels for that reason.



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