Have bond yields peaked?

In my previous post, I was discussing at ways to buy US Treasury ETFs, like the TLT (iShares 20+ Year Treasury Bond ETF. Looking at the US Treasury bond yields and there are some indications that they have peaked.

Let's take a look at the 10 year yield.

US 10Year Yield

The 10 year yield peaked around 4.2% last year in November, and attempted to climb past 4.0% in early March but has retreated, and is starting to find resistance at its MA 200.

US 2Year Yield

Meanwhile, the US 2 Year yield peaked at 5.0% in early March and fell to a low of 3.5% in the last week of March, but has since climbed back to around 4.1%.

Fed's Summary of Economic Projections

Fed Projected Rate 2023 and beyond

The Fed will release their summary of economic projections every March, June, September & December. At the last meeting in March 2023, their median projected Fed Funds rate for 2023 from FOMC voters was 5.1%. In 2024, the median rate is down to 4.1%, 2025 median rate 3.0% and the longer run the median rate is expected to be at 2.5%.

This implies at some point in 2024, the rates would be reduced. Hence it is such that the 2 Year yield (implying 2025) would likely be range bound between 3.0% & 4.1%. Looking further out, one might interpret that the 10 year yield could trend lower eventually.

Yield Curve Inversion

10 Year Yield minus 2 Year Yield

The 10 Year yield has been lower than the 2 Year yield since middle of 2022. In fact, this stretched to 1 percentage point between the 10 Year yield and 2 Year yield in March this year. 

When economic conditions are normal, the 10 Year yield will return more than the 2 Year yield, because bond holders get rewarded for locking away their money for longer. But since middle of 2022, bond holders get rewarded for putting their money in shorter term bonds. When the 10 Year Minus 2 Year is negative, meaning that shorter term bonds return more than longer term bonds, it usually is a leading indicator of a impending recession. 

Except the question that one needs to ask today, where is the recession if the job market is still so strong? Is the window for the Fed's soft landing getting narrower and is the economy headed for a hard landing and a deep recession? What happens if there is a recession, will the Fed be forced to cut rates?

Do you think there will be a recession? Where do you think the Fed funds rate would end up this year? Share your thoughts.

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