by Blaine Dickason
Senior Vice President
Portfolio Management and Trading
Bond yields, and specifically yields on U.S. treasuries, are a great barometer for the overall U.S. economy and to a lesser extent, the global economy. Chief among all the debt issued by the U.S. government is the 10-year Treasury, whose yield is one of the most closely followed indicators in global financial markets. Since the turn of the century, the 10-year Treasury yield has ranged from nearly 7% at the height of the dot-com bubble, all the way down to just 0.5% during the depths of the pandemic in 2020. As you can tell from these examples, it is a cyclical measure, and extreme measures tend to reflect extreme conditions in financial markets or the economy overall.
For much of the last two years, yields on the benchmark 10-year U.S. Treasury have remained fairly rangebound in the low-to-mid 4% range, with only a couple of short-lived trips to below 4% or approaching 5%. There has been no shortage of volatility within that range as markets have priced in elevated levels of economic uncertainty, however, as we depict in the slide below, we believe this recent range for the 10-year Treasury yield is actually a positive indication that the economy is in a relatively good place. Since Treasuries are typically considered a safe-haven investment in times of stress, lower yields are a signal that there is fear of economic slowdown, or perhaps an outright recession. In contrast, elevated or rising yields may be a signal of resurgent inflation, or a buyers’ strike as bond investors demand a higher yield to finance our federal budget deficit.
For long-term bond investors, the absolute level of yields available have been both relatively stable and attractive. Given inflation has receded to the mid 2% range, bondholders are receiving some of the highest real income, or yield in excess of inflation, since the mid-2000’s. This was the key driver to bonds earning their way back into client portfolios as we highlighted in our 2025 Investment Outlook at the start of this year.
We believe the signal being sent by the 10-year yield is that we are in a relatively stable economy, with modest growth expected, inflation under control and labor markets in relative balance between the supply and demand for workers.
Succession at the Federal Reserve
Federal Reserve Chair Jerome Powell’s term expires next May and the posturing and positioning to succeed him has already begun. Despite being appointed to his chairmanship by President Trump in 2017, it is no secret that the president is looking forward to having someone else in that role. His choice of nominee to succeed Powell is likely to be someone more closely aligned with his policy goals who can also maintain the confidence of Treasury market participants. A short list of four or five individuals has already emerged that includes current and former Fed Governors, the current U.S. Treasury Secretary and an economist in the current administration. As Chair Powell is in the last nine months of his term, any early word on President Trump’s nominee for this important position will begin to put Powell into lame-duck status as markets look forward to the next leader of our central bank and start to price in any anticipated shift in policy priorities.
Takeaways for the Week
The June Consumer Price Index (CPI) will be released on Tuesday, July 15. Current expectations are for a +2.6% reading of this measure of inflation as tariff impacts remain subdued.
Corporate earnings for the second quarter begin in earnest next week as reporting season kicks off for S&P 500 companies. Current estimates are for S&P 500 earnings to increase 5.0% versus the same quarter last year.