10-Year Treasury Yields at 2.8% in 2024?

If you have ever taken a Finance course, you probably remember how nominal interest rates are set. In case you forgot:

Nominal Interest Rate = Expected Inflation + Inflation Premium (Real Interest Rate)

Sounds so simple – doesn’t it? So, to arrive at a fair value for the 10-year nominal interest rates, we need to start with the expected inflation for that period.

Expected Inflation

Fortunately, there is market-derived data called the 10-Year Breakeven Rate. That rate is the average expected annual inflation over the period. Let’s see where it is today:

So, at present, the markets expect the inflation in the US to average about 2,17% annually for the next ten years.

It is important to note that the rate mentioned above is a tradeable instrument, a bit complex, obviously, but still a tradable instrument and a direct market observation, not an extrapolation.

Inflation Premium

How about the inflation premium? What should be the inflation premium of actual interest rates in the US over the next 10 years?

That is indeed a tricky question.

However, let’s start with what we can observe. What has that inflation premium been over the recent history?

As you can see, the inflation premium has varied quite a bit over the last 20 years – from nearly +2,5% in 2006 to almost -0,5% in 2020. Yes, the premium was negative in 2020 – something in the financial textbook we read said was impossible.

Anyway, over the last 20 years, that premium, the 10-Year Real Interest Rate, has averaged 0,95%; in the previous 10 years, it has been 0,62% (averages are calculated using monthly data).

10-Year Treasury Yield 2024 Prediction

We believe that in 2024, Real Interest Rates will come back down towards their long-term averages. We certainly think this is the most likely scenario to occur. So, if this is the case if in 2024, 10-year accurate interest rates decrease to 0,95% (20-year average) or 0,62% (10-year average), what does this mean for the US nominal 10-year rates?

Then, our expectancy for 10-year nominal interest rates varies between 2,79% (0,62% real interest rate) and 3,12% (using 0,95% real interest rate).

You read that correctly – we expect TNX ( 10-year US nominal interest rates) to drop below 3% in 2024.

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