This Key Bond Indicator Is Flashing A Buy Signal

This Key Bond Indicator Is Flashing A Buy Signal
Luke Suddards

over 1 year ago2 mins

Mentioned in story

This chart shows the difference, or “spread”, if you subtract the yield on the 5-year US Treasury bond from the 2-year Treasury (red line, left axis). It also shows the two-year US Treasury bond yield in blue (right y-axis).

Usually, the 2-year would yield less than the 5-year – after all, investors expect more return for a longer investment. And history shows that when that relationship flips, as it’s recently done (with the 2-year yield 0.39 percentage points higher than the 5-year), it’s time to pay attention. Because when it happens, it signals that the peak for the 2-year yield is not far off.

This is important because the 2-year bond is considered a proxy – in other words, it tends to track – the Federal Reserve’s (the Fed’s) key benchmark rate. So if the peak in the 2-year is not far off, neither then is the end of the Fed’s rate hikes.

Right now, Treasurys could be a good buy: they’re providing very chunky yields, and if the economy slows or slides into a recession, they’d see solid gains in price. What’s more, US bonds are seen as a safe haven, which makes them even more attractive. And while US inflation has cooled somewhat, it’s still way hotter than usual, and against that backdrop, investors would be drawn to bonds that offer higher real yields (yield, minus inflation). With the Fed the most hawkish central bank on the block, it could be more successful than its rivals in knocking down inflation. That would make US bonds attractive from a real yield perspective, and lure even more investors.

What’s more, Bank of America’s research shows the last time there were two back-to-back years of losses for US 10-year Treasuries was 1958-1959. Remarkably, in over 250 years, there have never been three straight years of losses. That may further tilt the odds in your favor if you want to buy bonds. The iShares 20+ Year Treasury Bond ETF (ticker: TLT; expense ratio: 0.15%) provides a way to do that.

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