Treasury’s ‘weird’ security approaches 5% yield, signaling 10-year rate may too

Nestled between the benchmark 10-year Treasury note and the 30-year bond is a security which rarely draws much mention: the 20-year, which was reintroduced by the U.S. government in May 2020.

The rate on the 20-year bond rose to 4.875% as of 3 p.m. New York time on Tuesday, up from Monday’s close of 4.847%, according to Tradeweb. That’s the highest level since its reintroduction, turning the 20-year yield into the first long-term Treasury rate to approach the 5% mark.

Long-term Treasury yields are in the process of returning to historically normal-looking levels, as the higher-for-longer theme in rates continues to play out in the wake of the Federal Reserve’s policy decision last week. Such a development matters for at least one big reason: At an almost 5% yield, long-term government debt becomes an ever-more compelling option over equities for investors who aren’t yet in that part of the Treasury market, presuming they time their entry just right.

Higher yields “tend to mean higher discount rates for equities and more options if you are an investor,” said Lawrence Gillum, a Charlotte, North Carolina-based fixed-income strategist for broker-dealer LPL Financial.

Historically speaking, a 3%-5% yield on the 10-year Treasury and its earlier counterparts is what has generally prevailed based on data going all the way back to 1880, he said via phone on Tuesday. And it’s not unrealistic to think that the 20-year yield could be paving the way for the 10- and 30-year rates to also get closer to 5% “because the economy is more resilient than most people and the bond market expected.”

The 20-year bond is “a weird security and kind of an outlier with not a lot of natural demand,” which explains why its yield is higher than that of the 10- and 30-year securities, the LPL Financial strategist said. “It’s not one of the benchmarks that people use, with the 10-year rate being the place where consumer loans are priced and the 30-year being where institutional investors will go to match their liabilities. That said, the 20-year is the highest rate in the back end of the yield curve, and will likely draw interest as a place to invest in.”

Earlier on Tuesday, 10-, 20-, and 30-year Treasurys all swung between buyers and sellers, underscoring how much investors are caught between enticing yields and the possibility that the higher-for-longer theme might have more room to run. All three yields finished the day higher, with the 10-year BX:TMUBMUSD10Y hitting a fresh 16-year high of 4.558% and the 30-year BX:TMUBMUSD30Y establishing a new 12-year high of 4.695%.

Meanwhile, U.S. stocks closed sharply lower, with Dow industrials DJIA shedding about 388 points or 1.1%. The S&P 500 SPX and Nasdaq Composite COMP ended down by 1.5% and 1.6%, respectively.

“Everyone talks about the 1-, 2-, 10- and 30-year Treasurys, but at around 4.88% the 20-year looks so attractive in terms of asset allocation and compared to equities in the long run that you should be hearing more and more people talking about it,” said John Farawell, executive vice president and head of municipal trading at New York bond underwriter Roosevelt & Cross.

The 20-year offers “the cheapest yield for Treasurys on the curve right now,” Farawell said via phone, referring to the selloff of the underlying government bond that’s sent its rate toward 5%. “And what’s happening right now is that these rates seem to be moving together, right in line with each other.”

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