Risk-Free 10-Year Bond Promises 53% Gain: Stocks Brace For Impact

The U.S. Treasury market took a substantial turn this month, as the benchmark 10-year Treasury note hit the crucial 4.35% yield threshold, a level unseen since November 2007. At the same time, the yield on the 30-year Treasury note soared to its highest level since May 2011, over a decade ago.

The market’s persistent anxiety over the Federal Reserve’s hawkish stance, emerged in the latest FOMC meeting minutes, and an uptick in bond supply from the U.S. Treasury have driven this notable spike in yields over the past weeks.

A 10-Year Treasury Now Offers A 53% Return Over The Next Decade

Leveraging the power of compound interest, a $1,000 investment in a 10-year Treasury bond with a 4.35% annual yield could grow to $1,529 by its maturity date.

Positioned as a risk-free haven, this investment avenue potentially offers a striking 53% cumulative return over the span of the coming decade. It’s important to underscore that this yield or return doesn’t account for the scarcely conceivable scenario of the U.S. Treasury defaulting on its bond repayment—a phenomenon unprecedented in history and carrying cataclysmic global financial implications.

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However, the actual risk resides in the interplay between the inflation rate and the yield provided by the 10-year Treasury note, which is tracked by the US Treasury 10 Year Note ETF UTEN.

Should inflation persistently exceed the yield, the real value of the investment could erode. Currently, market projections indicate an anticipated average inflation rate of 2.32% over the upcoming decade – also known as the 10-year breakeven rate – which effectively translates to a modest 2% real expected return on the bond.

Rising Treasury Yields Exert Downward Pressures on Stocks

Adam Turnquist, chief technical strategist at LPL Financial, commented on the intricate relationship between rising yields and the equity market.

Historically, a surge in yields has often coincided with stock market pullbacks, signaling a warning for potential corrections. However, in 2023 the correlation between stocks and 10-year Treasury yields has taken a rare turn, further accentuating the concern.

Communication services, consumer staples, and technology sectors are likely to face headwinds due to their inverse correlation with yields. Conversely, energy, showing technical strength, could continue to outperform if yields advance further.

Regarding the next levels to watch for the 10-year yield, Turnquist sees “4.50% (2006 lows) and 4.70% (prior mid-2000s highs) as the next major resistance hurdles to clear”.

Turnquist’s commentary also delves into speculative positioning and the upcoming Jackson Hole Symposium.

Speculative short positions in 10-year Treasuries have risen substantially, setting the stage for potential market volatility. He points out that if Federal Reserve Chair Jerome Powell delivers a dovish shift in monetary policy, yields could experience a sharp decline, potentially finding support around the 4.09% mark. While the possibility of a double-top formation is on the horizon, current risk leans toward yield escalation.

Now read: Larry Summers Predicts 10-Year Yields Will Hit 4.75% Or Higher In Next Decade As Economy Shifts To ‘New Era’

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