US equities continued to gain ground in May, with the S&P 500 Index advancing an additional 4.5%. However, Treasury yields have been remarkably stable since the equity markets bottomed on March 23, with the 10-year Treasury yield trading in just a 16 basis point range during the entire month of May. That all changed this month, as the benchmark yield broke out of its range, moving 30 basis points higher to 0.96% in the first five trading days of June.
So where can yields go from here? As shown in the LPL Chart of the Day, there may be more room to run before yields run into technical resistance from the 2019 lows. These lows near 1.4% coincide with the previous record lows from 2016, and may represent a tall task for the market to eclipse in 2020. Nevertheless, as of Tuesday’s close (June 9), a move to that level would represent a more than 50 basis point gain, and a significant headwind to fixed income investors already battling low absolute yield levels.
“Continued optimism surrounding the economy reopening, as well as rumors of yield curve controls from the Federal Reserve have likely contributed to the Treasury yields’ move over the past week,” said LPL Financial Senior Market Strategist Ryan Detrick. “We see more upside for yields as we look towards the second half of 2020.”
As we’ve discussed before, yields have historically risen after the Federal Reserve initiates quantitative easing, and while longer-term we believe the likelihood of a significant, sustained move higher is low, it seems the lows for the 10-year Treasury yield may be in for 2020.
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