Long-term Treasurys are slowly coming back into fashion, with the 10-year yield curve showing promise, reports an article in Barron’s. But though Treasurys such as the iShares 7-10 Year Treasury Bond ETF has been returning roughly 4% for the last quarter, the 10-year Treasury yield is still volatile, reaching a 52-week high of 4.23% in late October and then dropping to 3.4% in early December. It climbed back up to 3.9% by the end of the year, then fell slightly to 3.6% in the new year.
Duration—the sensitivity that bonds have to interest rate changes—has been problematic over the last year. As the Fed aggressively raised interest rates, pressure bore down on bond prices. Still, though rates are expected to rise further, “we are getting more comfortable increasing portfolio sensitivity to interest rates as we approach the end of the [Fed’s} rate-hiking cycle,” says Kelsey Berro of JPMorgan Asset Management. She thinks there are opportunities to be found in government debt, corporate credits, municipals, and other high-quality holdings in the 10-year section of the curve. However, if the Fed raises rates much higher than expected, that would put tremendous pressure on 10-year Treasury prices, making yields skyrocket. That’s not a risk worth taking, Yung-Yu Ma of BMO Wealth Management told Barron’s. He believes the short-term end of the curve, such as the 1-year Treasury, which is currently yielding roughly 4.75%, is a better bet. “The extra yield pickup is worth it, rather than locking into something longer,” says Ma, especially if rates peak at about 5%, which he predicts. The 10-year Treasury is too expensive to be a valuable protection, Ma insists.
But if the Fed continues to raise rates, the 10-year could offer investors a silver lining. With the yield around 3.6% right now, compared to 1.6% prior to the Fed’s first rate hike, that spread “provides additional cushion if yields were to rise or stay stable,” says Berro. So while long-term Treasurys still carry a risk, even a small allocation might be worth considering, the article concludes.