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What Happens After Historic Rate Declines?

Posted by lplresearch

The yield on the 10-year Treasury yield has been broadly declining since the early 1980s, when it peaked over 15%, but even over that long decline there have been intermittent periods of rising rates. In fact, after periods of especially large decline there has usually been an extended reversal over the next 1-2 years.

“The trend has been toward lower interest rates for almost 40 years, and over that period many have expected higher rates, only to be disappointed time and time again,” said LPL Financial Senior Market Strategist Ryan Detrick.

But there have been exceptions. Using quarter-end data, we looked at all the rolling one-year periods in which the 10-year Treasury yield fell more than 1.5%. As shown in the LPL Chart of the Day, this has occurred seven times since 1990, including the year ending on March 31.

Of the six prior occurrences since 1990, the 10-year Treasury yield was higher a year later all six times, averaging an increase of 0.92%, and also higher a year-and-a-half later, averaging an increase of 1.09%. That historical pattern, together with our expectation of an economic recovery over the second half of the year, support our forecast of the 10-year Treasury yield trending higher over the remainder of the year. However, the size of the move may be limited by the Federal Reserve keeping short-term rates low, limited inflationary pressure, and attractive yields relative to other developed markets.

large declines in treasury yields have turned higher over the next year
View enlarged chart

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All index and market data from Factset and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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