One Reason Why Mid- Long-Term US Treasury Yield Might Rise, Resulting in Loss

Now the US 10-year treasury yield stands at the 4% level. It feels cheap and it is time to buy. However, other than the chance of the Fed continuing to raise rates slowly, there is one other thing that might trigger the mid to long-term yields to rise, resulting in losses of those bond positions.

That is, the inverted yield curve started to move toward the normal curve shape. Even with a slight movement of the curve could result in losses in long-term treasury bonds that investors should not ignore.

My basis of argument comes from the technical view on price fluctuation would go in one direction when it has already gone dramatically in the other direction for a while. Of course, this needs the Fed not lowering the rate in the imminent future.

How Bad is the Yield Curve Inverting？

I ferreted out all times since 2000 when the yield curves were inverted and found out that today's yield is badly inverted. If we look at the difference between the 1-month yield and the 30-year one, the current yield curve inverted the most among all of the incidences, including ones in 2000, 2007, and 2019.

2023/8/7

• 1-month yield: 5.54%
• 1-year yield: 5.3%
• 5-year yield: 4.16%
• 10-year yield: 4.09%
• 30-year yield: 4.27%
• Yield deference between the 1-month one and the 30-year one: 1.27%.

2019/6/7

• 1-month yield: 2.3%
• 1-year yield: 1.97%
• 5-year yield: 1.85%
• 10-year yield: 2.09%
• 30-year yield: 2.57%
• Yield deference between the 1-month one and the 30-year one: 0.27%.

2007/3/23

• 1-month yield: 5.24%
• 1-year yield: 4.93%
• 5-year yield: 4.52%
• 10-year yield: 4.62%
• 30-year yield: 4.8%
• Yield deference between the 1-month one and the 30-year one: 0.44%.

2000/8/21

• 3-month yield: 6.3%
• 1-year yield: 6.2%
• 5-year yield: 6.1%
• 10-year yield: 5.79%
• 30-year yield: 5.71%
• Yield deference between the 3-month one and the 30-year one: 0.53%.

Yields chart since 1950

Then I looked at the short term and long-term yield trends since 1950, there have only been 3 times that the yield curves were probably worse than how it is right now.

Implications

Assuming there are 3 scenarios that would happen in the near future:

1. The yield curve becomes more inverted, and the long-term yield drops, resulting in bond price loss.
2. The yield curve becomes less inverted, and the long-term yield rises, resulting in bond price gain.
3. The yield curve maintains, and the long-term yield stays, not resulting in bond price gain or loss.

Which scenario would you anticipate more likely. With the yield curve inverted worse in 40 years. from a technical point of view, when some price moves in one direction dramatically for a while, it could rebound in the other direction for a short time.

But, if the Fed starts lowering rates in the near future, the issues of today' topic would not exist, because the inverted yield curve could be resolved without making the mid or long-term yields rise.