The 10-year Treasury yield is holding support above 1.20% as extreme short positioning in bonds recede. Typically, rising yields create opportunities in banking stocks, which benefit from higher interest income. Value stocks are also benefiting relative to growth stocks given the recent rise in yields.
While we are positioned for a short-term pickup in yields, the long-term trend suggests upside remains limited beyond 1.50% to 1.70%. The Federal Reserve has doubled down on its mandate of price stability by keeping rates low since the 1970s “great inflation” regime, the subsequent 1980s recession, and the 2008 global financial crisis. The 10-year Treasury yield avoided negative territory despite a sharp drop during the March 2020 pandemic scare.
Inflation expectations are moderating as the economy reopens and a short-term demand spike exceeds supply. For now, historical data show long-term Treasury bonds perform the best in July and August, while returns decline in September and October. This suggests the recent pickup in yields is on track with seasonality, albeit within the context of a long-term downtrend.