What Goes Down Must Go Up?

The yield on the benchmark US 10-Year Treasury Note has shown remarkable symmetry for approximately 80 years. It had been trending lower in 1920s and 1930s, the decades preceding WWII, and eventually bottomed out in 1941 at roughly 1.95 percent. For the next 41 years, the yield rose at a fairly consistent pace before spiking to its eventual peak—roughly 14.59 percent—in January 1982. (See Figure 1.) In the roughly 41 years since then, the yield reversed course and began a long, downward trend, aided most recently by the Federal Reserve’s unprecedented intervention during the pandemic. However, it appears this long-term downtrend ended in September 2022; at that time, the 10-year yield increased to 3.52 percent and shortly thereafter rose beyond 4 percent, its highest level since 2007. Symmetry is frequent in nature, but the near-perfect mirroring of the benchmark bond’s performance over time, as shown below, is uncanny.

Figure 1: The Secular Nature of US 10-Year Yields
 

Sources: (1) Online Data Compiled by Robert Shiller and published in Irrational Exuberance [Princeton University Press 2000, Broadway Books 2001, 2nd edition, 2005], (2) Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, April 30, 2023

The long-term trajectory of interest rates is important for our investments and the broader financial markets. For example, a company’s intrinsic value is the present value of the cash flows the company will produce in the future, and interest rates are a primary component of the rate used to discount those future cash flows. Higher interest rates generally suggest a lower present value, so in this way rates impact company valuations, forecasts, and allocations between asset classes. As the market continues to grapple with economic and geopolitical uncertainty, including the prospect of a recession, the path of longer-term interest rates remains an important question. Is the era of free and easy money over? Is our current environment a return to normalization or the start of a new secular move towards high rates? Time will tell, and the long-term trajectory of interest rates bears watching.

This article was published as part of the LBA Spring 2023 Reflections & Observations.