By Christine Idzelis
‘If we were truly facing a watershed moment for Treasuries, one would at least expect real rates to be through to 1-year highs,’ says Nicholas Colas, co-founder of DataTrek Research
Investors watched last week’s rise in the 10-year Treasury yield with concern that tariff uncertainty was hurting the appeal of U.S. government debt as a haven in market tumult.
But “if we were truly facing a watershed moment for Treasuries, one would at least expect real rates to be through to 1-year highs,” said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Tuesday. “That simply has not happened.”
The real interest rate on the 10- year Treasury note excludes inflation expectations as calculated by the Treasury Inflation-Protected Securities market, Colas wrote. Last week’s rise in the real 10-year yield appeared troubling, as it coincided with “tremendous” volatility in the stock market and fed into “worrisome narratives” concerning demand, according to his note.
“If the U.S. is becoming a less reliable lender, or if trade policy uncertainty is causing capital outflows, real rates will naturally rise,” Colas said. Still, although the real 10-year Treasury yield climbed last week to more than 2%, “that’s not even the high this year,” he said, pointing to the chart below.
The real 10-year Treasury yield rose to 2.28% on April 11, from 2.21% on April 10, according to data from the website of the Federal Reserve Bank of St. Louis. That’s up from 1.78% on April 3, the day after President Donald Trump announced sweeping tariffs that triggered market tumult.
When real yields on the 10-year Treasury note climb above 2%, that risks slowing economic growth, said Brian Ellis, a portfolio manager on the broad markets fixed-income team at Morgan Stanley Investment Management, in a phone interview.
Ellis said he likes the 2-year to 5-year portion of the U.S. Treasury bond market’s yield curve, areas that stand to benefit from price appreciation should the Federal Reserve cut interest rates this year on worries about slowing growth. Bond prices rise when yields fall.
“If we see growth concerns persist,” Ellis said, he expects that part of the yield curve “has room to move lower and it will outperform.” That’s because “it’s the most tied to monetary policy,” or the future path of the Fed’s benchmark interest rate, he explained, with the market currently expecting rate cuts this year on U.S. growth concerns.
While many traders are anticipating that the Fed will lower rates this year, the so-called term premium for the 10-year Treasury note risks rising on concerns that demand for long-term U.S. government debt could potentially weaken down the road, according to Ellis.
Investors are watching foreign appetite for 10-year Treasurys amid worries that it could be diminished amid the global trade war. That comes on top of existing worries over the large amount of debt the U.S. will need to issue to fund its fiscal deficit, he said.
While it’s tough to pinpoint the drivers of last week’s jump in the 10-year Treasury yield, Ellis said “levered players” may have contributed to its rise, as hedge funds may have been unwinding some of their related positions.
Meanwhile, recent fund flows indicate investors have been hungrier for shorter-term government debt.
Outflows from fixed-income mutual funds and exchange-traded funds were broadly “ugly” over the five days from April 4 to April 10, with investors pulling capital from areas including risky corporate credit as well as long-term government bond funds, according to a Barclays note on Monday. But funds focused on short-term and intermediate-term government debt saw inflows in that period, the note shows.
“A look at 10-year real Treasury yields from 2003 to the present further supports the idea that there is no immediate crisis of confidence in U.S. Treasuries,” Colas wrote.
“Real 10-year Treasury yields oscillated around 2.0 percent from 2003 to 2007, and they are around the same levels today,” he wrote. “The only outlier event was, understandably, in November 2008 during the depths of the Global Financial Crisis. Real yields topped out at 3.0 percent then.”
If real yields rise to 2.5%, which is around their October 2023 highs, “then the issue of structurally higher U.S. borrowing costs may be a source of concern to capital markets,” said Colas. “But not until then.”
The U.S. bond market was broadly rising Tuesday afternoon as rates in the Treasury market fell.
For example, the 10-year Treasury yield BX:TMUBMUSD10Y was trading about 4 basis points lower at around 4.33%, FactSet data show, at last check. That’s after the rate on the 10-year Treasury note finished Friday with its largest weekly jump since November 2001 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.
-Christine Idzelis
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04-15-25 1531ET
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