Why 10-year Treasury yields are likely to top out at 2% in 2022, says this fixed-income strategist
Predicting the path of long-term U.S. rates during the pandemic hasn’t been an easy task for Wall Street, particularly with inflation sticking around longer than many anticipated, and now at highs not seen since the 1980s. But Lawrence Gillum, fixed-income strategist at LPL Financial, sees the yield on the 10-year Treasury note
climbing only modestly in 2022, ending the year in a range of 1.75% to 2%.
“For 2022, near-term inflation expectations above historical trends and improving growth expectations once the COVID-19 variants recede are reasons why we believe interest rates could move moderately higher from current levels,” Gillum wrote in an outlook published Monday. On the flip side, an aging global population in need of income and continued bullishness around U.S. stocks, potentially triggering a “more frequent rebalancing into fixed income,” are two reasons why his team thinks longer-term rates will fail to move much higher next year. The S&P 500 index
on Tuesday ended lower, just short of scoring its 70th record close of 2021, and was up 27.4% on the year, while the Dow Jones Industrial Average
was on pace for an 18.9% yearly gain and the Nasdaq Composite Index
was up 22.5% this year, according to FactSet. At the same time, the 10-year Treasury yield
was at 1.480% on Tuesday in the year’s final week, or almost 55 basis points above its 52-week low of 0.915% set on Jan. 4, according to Dow Jones Market Data. Rates on 10-year Treasury notes traditionally are used to price everything from commercial property loans to corporate debt, and can be a Wall Street gauge of expectations for longer-term inflation. Read: A 10-year Treasury yield at or above 2% has been elusive. Here are the banks making it their 2022 call. “Coming into 2021, we expected Treasury yields to move higher from their very low levels, and they did,” Gillum wrote, pointing to his team’s (so far) correct prediction that longer-term rates would end 2021 between 1.50% and 1.75%. The Federal Reserve, at its final policy meeting of 2021, turned more hawkish by hastening its retreat from its $120 billion in monthly pandemic bond purchases, with an eye to ending the program in about three months. It also penciled in three rate hikes next year to help combat inflation. Even so, with “starting yields on core fixed income” low by historical standards, Gillum expects returns for 2022 “to be flat to the low single digits.” “Not a great year, but we should see an improvement over the negative fixed-income returns we have seen in 2021.” Read: Why inflation and the U.S. policy response will be key for markets in 2022