Chart of the Week

The Federal Open Market Committee (FOMC) kept the federal funds rate unchanged at 5.25% – 5.50% for the sixth straight meeting as of May 1. As expected, the Federal Reserve (Fed) pointed out that the trajectory of inflation remains worrisome, and it is still not prepared to cut rates. This may leave investors wondering how Treasuries are likely to perform amid the now-solidified narrative of higher-for-longer rates.

The chart above provides a long-term perspective of 10-year Treasury yields, filled with periods of rising and declining yields. For now, we do not envision yields entering a declining trend. Quite the opposite, the current trend is for long-term yields to remain higher, supported by positive real rates above 2.2% and stickier inflation expectations around 2.3% (10-year breakeven inflation expectations). Considered in conjunction, these numbers suggest that 10-year Treasury yields will likely remain near their recent range, in line with our year-end 2024 target range of 4.25% – 4.75%.

Our current view is that the Fed will attempt to cut rates twice before year end; however, the probability for the federal funds rate to remain on hold at current levels is increasing as inflation remains sticky. Accordingly, we continue to position portfolios defensively. We believe fixed-income investors may benefit by being most favorable short-term fixed income and neutral intermediate and long term. We expect the yield curve to continue to flatten, but events that could push 10-year U.S. Treasury yields toward 5% include the Fed openly removing rate cut expectations or outright hiking; inflation climbing higher; real gross domestic product growth increasing; or the U.S. fiscal situation deteriorating.

Forecasts, estimates, and projections are not guaranteed and are based on certain assumptions and views of market and economic conditions which are subject to change.

Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate.

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