Strategists at Bank of America have made a shocking prediction for 2023 - the 10-year Treasury bond is poised for its third consecutive year of losses. This would mark the first time such a phenomenon has occurred in U.S. history, dating back nearly 250 years.
So far this year, investors have seen a negative return of 0.3% on the bond, following a steep decline of 17% in 2022 and a drop of 3.9% in 2021. The Bank of America experts, led by Michael Hartnett, shared this concerning information in a note on Friday.
But what has caused this alarming trend? According to the strategists, the answer lies in the remarkable 40% surge in U.S. nominal GDP growth (which includes both growth and inflation) since the lows experienced during the COVID-19 pandemic in 2020. They even provided a chart to visually demonstrate the impact of this growth.
Unfortunately, bond returns have suffered as a result of the Federal Reserve's ongoing campaign to raise interest rates in an attempt to stabilize inflation. Hartnett and his team believe that this decade will see significantly lower returns for both stocks and bonds, influenced by various political, geopolitical, social, and economic trends.
While stocks have enjoyed a better year, thanks to a post-pandemic rebound, the recovery has been heavily concentrated in U.S. stocks, particularly in the technology sector. The analysts noted that the breadth of the rally in global markets has been alarmingly narrow. In fact, they described it as the worst breadth since 2003 for the MSCI ACWI index, which encompasses large and mid-cap stocks across 23 developed markets and 24 emerging markets.
In terms of fund flows, Bank of America reported that $10.3 billion went into stocks, $6.5 billion into cash, $1.7 billion into bonds, and a total of $300 million was withdrawn from gold in the latest weekly data.
The yield on the 10-year Treasury bond remained steady at 4.102% on Friday, following data indicating a rise in job creation for August. However, the unemployment rate increased from 3.5% to 3.8%, and there were revisions to job gains in July and June.
Overall, the outlook for the 10-year Treasury bond seems grim as 2023 approaches, leaving investors concerned about the ramifications of this unprecedented historical loss.
