Investors are locking in 4% yields for 10 years as a safety play
by Michael MacKenzie and Ye Xie
All it took was a classic bout of haven buying to wake up a slumbering Treasuries market and drive benchmark yields to the lowest in months.
At a time when the US government shutdown has delayed key official readings on employment and inflation, jitters around regional banks’ credit exposure jolted Treasuries last week, after yields had barely budged for days. The move came as an index of the lenders’ shares slid the most since April’s tariff-fueled market chaos.
As rattled investors piled in, the monetary policy-sensitive two-year yield dipped below 3.4% to the lowest level since 2022, while the 10-year made its deepest push below 4% since April. It was the second round of haven-buying for Treasuries in October, after the reemergence of trade tensions sparked an even bigger rally the week before.
Already buoyed by signs of weakening employment conditions that have made a quarter-point Federal Reserve policy easing on Oct. 29 look like a given — investors are locking in 4% yields for 10 years as a safety play given the rich valuation of equities and credit markets.
“Treasuries have worked as a great risk-off hedge over the last week,” said Priya Misra, a portfolio manager at JPMorgan Investment Management. “Rates can fall further” on any additional credit worries or trade jitters, and the asset manager owns exposure in 5- to 10-year maturities, which give “the comfort to hold on to credits we like.”
Even the 30-year Treasury has gained ground, countering worries of a global debasement trade given the hefty borrowing needs of major economies, which helped propel gold to a record above $4,000 an ounce.
Fed View
The trajectory for Treasuries from here largely depends on traders’ expectations for how deeply the central bank will ultimately cut rates over the coming 12 months or so. In a speech last week, Fed Chair Jerome Powell pointed to the low pace of hiring and noted that it may weaken further.
The Fed resumed its easing cycle in September with a quarter-point reduction to a range of 4% to 4.25%. A market proxy for the so-called terminal rate for this cycle fell below a recent floor of 3% this month, and is approaching cycle lows from September 2024.
After Oct. 29, another quarter-point cut is priced in for December, and then potentially two more by mid-2026.
This month has served as a reminder of Treasuries’ traditional role as ballast for portfolios during times of crisis. It’s also the opposite of what happened during a brief stretch of April, when President Donald Trump’s tariff rollout roiled markets and sparked concern that global investors would shun Treasuries. For a period, Treasuries slid along with stocks and the dollar.
The sudden bond rally was reminiscent of March 2023, when the collapse of Silicon Valley Bank unleashed a drop of more than a percentage point in the two-year yield.
The 10-year rate has only dipped below 4% a handful of times since April. It briefly fell to 3.93% on Friday, the lowest since April 7, before rebounding to 4% as Trump softened his tone on China and as regional-bank earnings eased credit concerns. The yield was up 1 basis point at 4.01% early Monday.
“There is room below 4%” in the 10-year, “but things would need to deteriorate much further from here,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
What Bloomberg strategists say...
“Until some of the unknowns — the shutdown, the credit market picture, the tariffs — become known, yields on 10s are unlikely to stray too far from 4%.”
— Alyce Andres, strategist, Markets Live.
Traders are using options to protect against a sharp drop in 10-year yields further below 4%. A deeper slide could turbocharge gains by fueling further hedging. That could enhance what’s shaping up as the best year for Treasuries since 2020. The Bloomberg Treasury index is up 6.6% this year through Thursday.
Morgan Stanley rates strategists, headed by Matthew Hornbach, are among those seeing scope for lower 10-year yields. Investors should bid “a fond farewell to 10-year Treasury yields above 4%,” they wrote in a report this month, pointing in part to the potential for worries around the shutdown to grow the longer it lasts.
This week does bring one crucial set of government data. September’s consumer price index, originally set for Oct. 15, will now come on Friday.
Investor worries about what that release will show “may prevent 10-year Treasury yields from falling too far below 4%” for the time being, Morgan Stanley’s Hornbach said in an email.
Economists expect an unchanged CPI core reading on the month, leaving the headline measure running at an annual pace of 3.1%, well above the Fed’s 2% target for inflation.
What to Watch
- Economic data: {Note: US government data releases are impacted by the shutdown}
- Oct. 20: Leading index report delayed by shutdown
- Oct. 21: Philadelphia Fed non-manufacturing activity
- Oct. 22: MBA mortgage applications
- Oct. 23: Chicago Fed national activity delayed by shutdown; initial jobless claims; existing homes sales; Kansas City Fed manufacturing activity
- Oct. 24: Consumer price index; S&P Global US manufacturing/services/composite PMIs; new home sales; University of Michigan sentiment; Kansas City Fed services activity; Bloomberg US economic survey; building permits
- Fed calendar:
- External communication blackout before Oct. 28-29 meeting
- Auction calendar:
- Oct. 20: 13-, 26-week bills
- Oct. 21: 6-week bills
- Oct. 22: 17-week bills; 20-year bond reopening
- Oct. 23: 4-, 8-week bills; 5-year Treasury inflation-protected securities
Copyright Bloomberg News
