Recession Panic Sends Investors Flocking To Treasuries: How Low Can The 10-Year Yield Go?

U.S. Treasuries are once again serving as a safe haven for investors as they digest gloomy economic data that suggests a recession may be in sight.

Both initial and continuing jobless claims were higher than anticipated, at 228K and 1823K, respectively. Additionally, there were disappointing statistics released this week such as the ISM PMIs, ADP, and the JOLTS report, all of which indicated that tighter financial conditions are already harming the U.S. economy. 

The yield on the two-year Treasury note has fallen for five consecutive sessions. This kind of run hasn't occurred since July 2021. Yields on 10-year Treasury notes have dropped by 85 basis points to 3.25 percent from their March highs, and have reached their September 2022 lows.

The duration-heavy iShares 20+ Year Treasury Bond ETF TLT has registered gains in the past seven consecutive sessions and is up about 10% since its March lows.

Sharp declines in yields, and hence excellent price performance in Treasury bonds, have been supported by expectations of a pause in Fed rate-hiking in May, followed by a set of rate cuts this year.

According to the latest CME Group Fedwatch, traders assign a greater likelihood of the Fed keeping rates on hold (60%) rather than raising them by 25 basis points (40%) in May, and they have already factored in four rate cuts of 25 basis points by January 2024.

Will the downtrend in U.S. Treasury yields continue, or have we reached a bottom here?
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U.S. 10-year Yields Forecasts: Views From The Street

• Bank of America Securities forecasts 10-year Treasury rates of 3.25% by the end of 2023, in light of a second-half recession and a strong disinflationary trend.
• ING Groep N.V. sees the 10-year yield in the United States dropping to 3% by the end of the year before climbing again in the second half of next year.
• Goldman Sachs economists have an out-of-consensus forecast on U.S. Treasury yields; they expect the 10-year yield to increase to 4.2% by 2023.

Technical Analysis: US-10 Year Yields May Target 2.88% Next

In the first week of April, U.S. 10-year yields significantly broke below a multi-year positive trendline that began in August 2020. Yields have also fallen below both the 50-day and the 200-day moving averages, thus reinforcing the idea of a reversal of the major bullish trend. 

According to Fibonacci retracement analysis, the next key support level might be 2.88%, which corresponds to the 38.2% retracement of the August 2020-October 2022 range. 

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