Treasury yields hit two key levels the first week of 2021. As shown in the LPL Chart of the Day, the 10-year Treasury yield moved above 1% for the first time since March 2020, and the 10-year breakeven inflation rate, a measure of Treasury market-implied inflation expectations, climbed above 2% for the first time since November 2018.
“When stocks began to rally back in March 2020, Treasury investors stayed more cautious,” said LPL Research Chief Market Strategist Ryan Detrick. “But since early August 2020 the 10-year Treasury yield has been climbing, and we think we may see more of the same over the rest of 2021.”
1% is still a low level for the 10-year Treasury—in fact, before 2020 it would have been a record low. But the move higher has been meaningful. The 10-year Treasury yield has been rising roughly 8 basis points (0.08%) per month since August, although the path has not been a straight line. We don’t think that rate of growth is sustainable over a full year, as we may see buyers, especially foreign buyers, come in more actively as yields move higher; 1.4–1.5%, near the 2012 and 2016 lows, may be an attractive buying point from a technical perspective. In addition, Federal Reserve (Fed) activity, a change in the economic outlook, or stock market volatility could all change the path of rates.
Despite a climbing 10-year Treasury yield, the 10-year Treasury Inflation-Protected Securities (TIPS) yield actually declined over December 2020 and into January 2021. The difference between the two, called the breakeven rate, reflects implied inflation expectations over the next 10 years. The breakeven rate generally has been held below 2% since October 2014, except for 2018 when it ran closer to 2.1% for much of the year. With the Fed allowing inflation to run a little hot, the breakeven inflation rate may widen a little more from current levels, but at some point growth expectations should lift the TIPS rate as well, helping to keep the breakeven rate near current levels.
Hitting these two key levels last week is an important sign of continued economic progress. Our target for the 10-year Treasury yield remains 1.25–1.75% for year-end 2021, supported by continued economic improvement and a manageable pickup in inflation.
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