Expected 2012 Price Drop in 10-Year Treasuries: -5%

By Simeon Hyman | January 5, 2012
  • What's Happening

    What Happened

    The 10-year Treasury bond is among the best-performing investments over the past year, returning 17 percent in 2011, far better than stocks and commodities. History may not repeat itself in 2012. A consensus of investment strategists surveyed by Bloomberg foresees the yield on 10-year U.S. bonds increasing to 2.6 percent by year's end, up from 1.8 percent at the end of this past December. For yields to rise that much, 10-year Treasuries would have to fall around 5 percent in price.

    Photograph by Tim Boyle/Bloomberg

  • Why It Matters

    Why It Matters

    If Treasury prices fall as much as predicted in the Bloomberg survey, it likely won't be because of anything sensational, such as a rating downgrade, which proved a mere bump in the road for Treasuries in 2011. It will have more to do with signs of strength in the economy, which would likely get the Federal Reserve to wind down its support of bond prices. It would also signal that investors have moved on from bonds and become more comfortable owning riskier assets, such as stocks.

    Graphic by Charlos Gary/Bloomberg

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    What about the adage that rising interest rates are bad for stocks, the way they are for bonds? If rates go up, future earnings and dividend payments will be worth less, since higher rates reduce the value of future dollars. It would seem, then, that stocks wouldn't do well during periods of rising rates. One of the differences between stocks and bonds, however, is that interest payments are fixed, whereas companies' earnings and dividends can increase. If higher rates are a sign of stronger economic growth, stocks can thrive (chart). This is the equity sweet spot: enough growth to prompt investors to bid stocks higher, while rates rise only modestly, keeping their negative impact in check.

    Graphic by Charlos Gary/Bloomberg

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