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Can the 10-year yield go to 5%? Rising yields are what really matters for the markets. Once again, bonds are moving down in tandem with stocks . This happened last year, and the results were not good for stocks. This is an historic change in trend. Since the 1980s, interest rates have trended lower, and that has been a tailwind for stocks. That’s not true anymore. Bruno Braizinha, U.S. rates strategist for Bank of America, tackles this issue head-on in a note to clients Tuesday morning: “10yT at 5% – What Would it Take?” The primary factor that would move the 10-year towards 5%, Braizinha says, is a reacceleration of the economy. If the economy keeps getting stronger, that could support higher yields. But it would have to be materially stronger — a “reacceleration” of growth with a strong conviction around the outlook. A soft landing (still growth, but with lower inflation) won’t do it. A soft landing is “more likely to push 10yT yields back to c.4%,” Braizinha says. A stronger economic outlook might also drive a repricing of the Fed’s “neutral interest rate” (the rate that supports the economy at full employment while keeping inflation constant). That would imply fewer rate cuts in 2024 and 2025. All of this would reduce demand for Treasurys, but the ocean of Treasury debt can also be a factor driving yields higher. Braizinha sees supply continuing “at relatively high levels.” How likely is all this? Braizinha notes that the soft landing is still his base case and would “push back” against a 5% 10-year yield. He also notes that “the degree of conviction” around a stronger economy “seems to have deteriorated.” In other words, it would take a lot to move the 10-year to 5%. However, Braizinha also outlines “hedging scenarios” for clients that involve bond ladders . In other words, Braizhina says he doesn’t think 10-year yields going to 5% is the most likely outcome, but for his clients that are worried about it, he showed them how to protect themselves. That’s a sure sign of concern.
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