BIG NUMBER | 2.59%

• The increase in Treasury yields is primarily driven by higher real yields (inflation-adjusted returns) due to economic resilience, not rising inflation expectations despite oil price increases and fiscal deficit concerns
• Real yields have been suppressed for many years and are now returning to more traditional levels, with the rise concentrated in shorter-maturity bonds influenced by Federal Reserve policy expectations
• Fed Chair noted 'real consumer spending has been healthy' and would not describe current financial conditions as restrictive, suggesting higher rates alongside healthy growth differ from rising rates in a weakening economy

Market Summary: 10-Year Treasury Real Yield Reaches 2.59%

Key Development:

The 10-year Treasury note's real yield (return above expected inflation) has risen to 2.59%, while the nominal yield exceeded 5% for only the second time since 2007. This comes amid a Federal Reserve meeting to determine potential interest rate adjustments to combat inflation.

Main Analysis:

Horizon Investments argues that higher yields don't necessarily indicate market stress or restrictive conditions in the current environment. The recent yield increase stems primarily from higher real yields driven by economic resilience rather than inflation expectations, despite rising oil prices and fiscal deficit concerns.

Market Context:

• Yield increases have concentrated in shorter-maturity bonds, influenced mainly by Fed policy expectations
• The rise reflects a repricing to more typical interest rate levels after years of historically abnormal lows
• Fed Chair Kevin Warsh recently noted "real consumer spending has been healthy" and wouldn't characterize financial conditions as restrictive

Investment Implications:

While higher rates can pressure stock valuations, the firm views today's elevated real yields as evidence of economic strength rather than weakness. The rising yields alongside healthy growth differ significantly from rate increases during economic downturns. According to the analysis, current yields suggest the economy can sustain growth and that businesses and investors can continue productive spending and investment despite higher borrowing costs.

Outlook:

Horizon interprets higher real yields as reflecting expectations for stronger future economic growth, a higher neutral policy rate, and more productive investment opportunities—ultimately a positive rather than concerning development for markets.