Is It Time to Buy US 10-Year Notes? Based on Fed's Projection for Rates

This article is about downside risk calculation based on March 2022 Fed's rate projection.

The moment I am writing this article, the US 10-year treasury yield is traded at 2.904%, which seams to be a good deal. Form the point of view of "4% return rate can support a retirement life from a total SP500 index fund portfolio", is just 1.096% off of it.

The following Calculation is based on the following information obtained from Wall Street Journal, and assume all US 10-year note pay semi-annual coupons with absolute default risks.

What did the fed say

Federal Open Market Committee announced the 0.25% rate incrase on the 3rd of March, 2022. Along with this announcement was the projected rate during the years of 2022, 2023 and 2024. Here are the predicted federal funds rates:

• In 2022, the medium is 1.9% which is 1% higher than December projection.
• In 2023, the medium is 2.8% which is 1.4% higher than December projection.
• In 2024, the medium is 2.8% which is 0.7% higher than December projection.
• In 2022, the range of Fed funds rate is 1.4%-3.1%.
• In 2023, the range of Fed funds rate is 2.1%-3.6%.
• In 2024, the range of Fed funds rate is 2.1%-3.6%.

The Downside Risk of US 10-Year Notes

We could estimate the downside risk of the US 10-year note based on the Fed's estimates on The Fed funds rates.

Calculation Based on the Medium Projection of 2022

In projected medium Fed fund rate is 1.9% which is 1.4% higher than the upperbound of current rate of 0.25%-0.5%, and the 10-year bond yield is 2.904%.

If the 10-year note yield rises 1.4%, the bond's price will drop 11.737%.

Calculation Based on the Highest Projection

The highest projection for the Fed funds rate is the high-end of 3.6% in 2023, which is not too far away from now. 3.6% is 3.1% higher than what it is right now. 

If the 10-year note yield rises 3.1%, the bond's price will drop 23.96%.

Coud be worse?

The worst case scnenario is based on the Fed's projection on Fed funds rate. If we take into acount the increase in projection such as the medium rate for 2022 was 0.9 in the last meeting, but current assessemnt is the medium rate would be 1.9%. This is a full 1% increase. 

So taking into acount the worse increase in rate projections, which is the 1.4% change of medium rate in 2023, we have the following calculation.

If the 10-year note yield rises 4.1%(3.1% + 1%), the bond's price will drop 30.25%.

Conclusion

Even though a 2.9 yield seems attractive, with the possible yield increase, we, as invsetors in bonds, could lose a ton of money. 

Notes. The calulatoin in this article is based on 10 year bonds that pay semi-annual coupons that are issured at the time of calculation and rate increase in instaenous. These assumptions may not be realitic, however, do give us an idea how mush the bonds' prices would drop. I also assume that the US 10-year bond's yield changes at the same amount with the Fed funds rate.

Related ETF

• iShares 7-10 Year Treasury Bond ETF, 1-year return:-4.05%.
• SPDR® Bloomberg 7-10 Year U.S. Treasury Bond UCITS ETF, 1-year return:-4.09%.