10-year Treasury yield tops 5% as century-worst returns attract cautious buyers

  • Kevin Warsh announced the first rate hike in three years as Federal Reserve chair.
  • The 10-year Treasury yield briefly exceeded 5% before easing to 4.948% Thursday.
  • U.S. bond funds posted net inflows for 71 consecutive weeks, led by short-duration funds.

The U.S. Treasury market is experiencing its most severe return environment in more than a century, with the 10-year Treasury yield briefly rising above 5% this week to a 19-year high before easing to 4.948% on Thursday. Goldman Sachs strategists said the note's five-year rolling return has fallen to a century-low, with inflation-adjusted performance approaching the weakness seen after World War I, World War II and during the 1970s stagflation era. The Bloomberg Aggregate Bond Index, a broad measure covering Treasuries, corporate bonds, mortgage-backed securities and other government-backed debt, fell 1.6% on a total-return basis this year through last Wednesday. Higher oil prices, persistent inflation and the prolonged Iran War have pressured longer-duration debt. Yet rising yields are drawing new money into bonds: U.S. bond funds have recorded net inflows for 71 consecutive weeks, with short-duration funds receiving approximately $139.9 billion, or 12.2% of assets under management, compared with approximately $19.3 billion, or 2.9%, for long-duration funds. A $19 billion 10-year TIPS (inflation-protected Treasury securities) auction produced a 2.653% real yield, the highest since 2008, while a $13 billion 20-year bond auction reached a record 5.420% awarded yield. The Federal Reserve projects inflation at about 3.7% at the end of this year and a return to its 2% target only in 2029. The bond outlook remains dependent on the Iran War, inflation and expanding government and corporate borrowing.

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