Long-term Treasury yields made lower highs than prior cycles despite high levels of inflation measures.

Since the start of 2022, the federal funds target range has moved from 0-0.25% to 4.75-5%, and the Consumer Price Index (CPI) year-over-year growth rate made a high of 9.0% in June 2022. While 4.75-5% is a lower absolute level than prior rate hiking cycles, 4.75% is the most that has been added to the target rate during a hiking cycle since the early 1980s.  The 9.0% year-over-year growth in CPI is also the highest since the early 1980s.

Source: Macrobond.

Despite a larger increase in the federal funds rate and higher CPI growth than the last three hiking cycles, long-term interest rates made lower highs compared to the last three hiking cycles.

As of the beginning of April, the closing high in the U.S. 10-year Treasury has been 4.25%, reached in late October 2022.  The 10-year yield has since decreased to 3.35%, despite more increases in the federal funds level and more discussion from the Federal Reserve regarding the need to keep interest rates elevated.  The 30-year U.S. Treasury yield made a closing high of 4.40% in late October 2022 and has since decreased to 3.60%.  These peaks are much lower than prior cycles that had lower levels of inflation growth.

Source: Macrobond.

During the hiking cycle leading into the 2008 recession, the Federal Reserve started increasing their target in June of 2004 at 1.00% and stopped in July 2006 at 5.25%.

Source: Macrobond.

The 30-year Treasury yield was at a high of 5.61% at the beginning of the hiking cycle and made lower highs of 5.30% at the end of hiking cycle and 5.35% in July 2007, just before the rate cutting cycle started.  10-year yields made a high of 5.26% at the end of the hiking cycle and the beginning of the rate cutting cycle.

Source: Macrobond.

During this hiking cycle, the highest year-over-year CPI growth rate was 4.74% in September 2005 and 5.50% in July 2008 during the rate cutting cycle.

Source: Macrobond.

During the hiking cycle leading into the 2001 recession, the Federal Reserve began increasing their target level from 4.75% at the start of 1999 to 6.50% in June 2000, before starting to cut rates in 2001.

Source: Macrobond.

The yield on the 30-year Treasury peaked at 6.75% in January 2000, while the 10-year Treasury peaked at 6.79% during this period.

Source: Macrobond.

The highest CPI year-over-year growth rate during this cycle was 3.76% in March 2000.

Source: Macrobond.

In the aftermath of the savings and loan crisis at the end of 1980’s, the Federal Reserve increased their target rate from 6.50% in March 1988 to 9.75% in March 1989 before cutting rates later that year.

Source: Macrobond.

The yield on the 30-year Treasury peaked at 9.46% in late August 1988 and the yield on the 10-year Treasury peaked at 9.53% in March 1989.

Source: Macrobond.

During this hiking cycle, the highest level of year-over-year CPI growth came after the rate hikes ended (5.25% in May 1989 and January-March 1990, and 6.25% in September-December 1990 when oil spiked following the invasion of Kuwait).

Source: Macrobond.

The lower absolute level of 10- and 30-year Treasury rates in this current cycle, despite higher CPI growth rates and more rate hikes than the prior periods, could suggest that investors expect the weaker post-2008 growth and inflation environment to likely continue.

From the end of the recession in 1990, to the start of the recession in 2001, average year-over-year GDP growth on a quarterly basis was 3.60%.  Year-over-year CPI growth on a quarterly basis averaged 2.70% over the same period.  From the end of the recession in 2001 to the start of the recession in 2008, GDP growth averaged 2.80% and CPI growth averaged 2.60%.  From the end of the recession in 2009 to the end of 2019, GDP growth averaged 2.10% and CPI growth averaged 1.70%.

Source: Macrobond.

A return to an environment of under 2% annual growth and inflation could warrant a return to lower Federal Fund target rates and longer-term Treasury yields.  This could be what investors are expecting to occur in the coming years.

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.