News

Treasury Yields Finish 2023 with Modest Changes

1 2 3 4 5

4.9

Andrew R. Michaud

• December 29, 2023

Treasury yields experienced a tumultuous year in 2023, hitting a 16-year high above 5% before ultimately ending the year not far from where they started. Investor expectations for Federal Reserve interest rate cuts in the following year prompted a retreat in the 10-year rate towards the end of the year.

On the last trading day of the year, the 2-year Treasury note yield fell by 2.5 basis points to 4.287%. Meanwhile, the 10-year Treasury note yield rose by 4.1 basis points to 3.883%, and the 30-year Treasury bond yield increased by 4.8 basis points to 4.037%. It is worth noting that yields and debt prices move in opposite directions.

Throughout the year, the policy-sensitive 2-year Treasury yield experienced its first yearly decline since 2020, decreasing by approximately 12 basis points. In contrast, the 10-year yield only saw a modest increase of 2 basis points, and the 30-year yield had a slight rise for a third consecutive time, gaining around 5 basis points.

Given the upcoming New Year's Day holiday, trading is expected to be light, with the U.S. bond markets closing an hour early at 2 p.m. Eastern Time.

Treasury Yields and the Stock Market in 2022 and 2023

In 2022, Treasury yields experienced a significant surge, resulting in the worst year ever recorded for bonds. The Federal Reserve took aggressive measures to combat inflation by raising rates, contributing to this situation. The following year, in 2023, yields continued to rise as the Fed communicated its plans for a "higher for longer" rate environment. However, eventually, they slowed down and even paused rate hikes.

Notably, in October, the 10-year yield surpassed 5% for the first time since 2016. Nevertheless, it has since retreated considerably due to the Fed's indications that not only were rate hikes complete, but also cuts were anticipated in the coming year. Interestingly, market participants are anticipating a more aggressive series of cuts, with expectations for them to commence in the first quarter.

Analysts attribute the decline in yields to a year-end rally in stocks. As a result, on Thursday, the Dow Jones Industrial Average (DJIA) achieved yet another record close. Moreover, the S&P 500 (SPX) remained just below its previous record finish set on January 3, 2022. Throughout the year, the S&P 500 experienced an impressive growth of nearly 25%.

Stock Market Today: S&P 500 Takes Aim at Record High

As we near the end of 2023, the S&P 500 is poised to reach a record high on the final trading day of the year. This signals the continued positive momentum seen in the stock market.

Heading into 2024: Treasurys and Yields Forecast

As we approach the new year, it appears that Treasurys will face upward pressure while yields are expected to decline. However, it's important to note that the decline in yields may not have the same positive impact on stocks as it did in the previous year.

Tom Essaye, the founder of Sevens Report Research, suggests that if the 10-year yield breaks through the support level of 3.75% and continues to drop towards 3.00%, investors could interpret this as a warning sign for the economy. This cautious sentiment arises in light of the Federal Reserve's recent pivot.

It's worth observing how these potential developments unfold as we progress further into 2024.

Note: Tom Essaye is the founder of Sevens Report Research and shared these insights in a note published on Friday.