After Two Years Of Losses, This Asset Appears Ready To Break Higher

After Two Years Of Losses, This Asset Appears Ready To Break Higher
Luke Suddards

10 months ago2 mins

The ten-year Treasury bond has had a rare two-consecutive years of losses, but Bank of America (BofA) says this year, they're convinced it’s headed higher.

This chart shows the benchmark note’s yearly performance since the late 1700s (blue bars). As you can see, it tends to stay near its “mean” level, only rarely reaching above or dipping below one standard deviation (dotted lines). Last year (red bar), was an exception, when the Treasury plunged 17% as super-high inflation and an aggressive rate-hiking campaign from the Federal Reserve (the Fed) created a toxic cocktail for the asset, giving it its worst year since 1788.

So that brings us to 2023, and US government bonds’ fortunes look to be turning a corner. Inflation has taken a turn lower and the Fed has eased up on those rate increases, so the two factors that drove bonds into the ground last year are expected now to help push them higher. And with economic growth slowing and recession risks heating up, safe-haven assets like Treasury bonds are likely to become extra popular.

What’s more, positioning among speculative traders – the opportunistic, shorter-term, non-buy-and-hold players – are significantly net short on Treasuries. That creates fertile ground for a potential short squeeze, whereby an asset’s rising price forces short traders to rapidly close out their positions by buying the bonds back – a situation that adds further upside pressure to price.

So it could shape up to be a good year for the ten-year US Treasury note, which has never had negative returns three years in a row. To invest in the asset, you could consider an ETF, like the iShares 20+ Year Treasury Bond ETF (ticker: TLT; expense ratio: 0.15%). Just remember: longer-dated bonds are more sensitive to interest rate changes, so they can have bigger price swings than shorter-term ones, but they also can deliver higher returns.



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