The US Treasury market has long been a haven for investors during times of market strife. More recently, sovereign bonds have not provided a strong hedge against a decline in equities, leading asset allocators to reassess a traditional 60-40 portfolio construction and address longer-term risks should rates remain higher for longer. With inflation surging to a 40-year high, the outlook for rates has changed significantly in 2022.
Still, the 10-year Treasury yield is six presidents and two Top Gun films removed from the last time it saw double digits in 1985. A return to those levels would have significant investment and risk-management implications.
In our survey, US investors give greater weight to economic and inflation-related risks, reflecting recent market trends including a sharp rise in consumer prices and the Federal Reserve’s moves to tighten monetary policy. Given heightened interest rate risks, the yield on the 10-year Treasury note rose to 4% for the first time since 2008 in May. Just two years earlier, it was hovering around 0.64%, near its all-time low.
If the 10-year yield does reach double digits in the next three years, US investors believe it would have a significant impact on investment portfolios, with 62% predicting an extremely severe outcome. Globally, less than half (48%) offer the same forecast.
US 10-Year Treasury Yield
Source: Board of Governors of the Federal Reserve System (US)
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