Since the U.S. elections in November, 10-year Treasury yields have risen markedly, as, of course, has the S&P 500. The current steepness of the yield curve – in other words, the difference in yield between bonds with shorter and longer maturities – is creating an opportunity in the Treasury market. On a six-month view, we believe that 10-year Treasurys – which yield more than their shorter-dated equivalents – now look like an attractive home for money relative to cash.
The continued improvement in the U.S. economic situation has been reflected in the Federal Reserve's bias towards tightening monetary policy, along with market expectations of fiscal stimulus under President Donald Trump. This improvement led to a substantial sell-off in government bond markets after the U.S. election in November. After rising roughly 0.6 percentage points, the 10-year Treasury yield has since traded in a narrow range around 2.5 percent.
Following this move, we believe that the sell-off has largely run its course. Historically, 10-year Treasury yields have tended to peak relatively early in the Fed rate tightening cycle, as markets typically move swiftly to price in a full series of rate hikes.
In addition, a continuation of stimulative monetary policy in much of the rest of the world should dampen further increases in U.S. 10-year rates, as global investors hunt for yield. As a result, over a medium-term investment horizon, we think the 2.5 percentage point difference between the yields on 10-year Treasurys and cash is high enough to compensate for 10-year Treasurys' investment risks.
Recent statements by Federal Open Markets Committee members have led us to anticipate two or three 0.25 percentage point rate hikes this year. We have revised up our forecasts for Treasury yields with a tenor of up to five years.