Why Treasuries Appear Overvalued?
1. Limited Room for Further Yield Declines:
Treasury prices have already recovered more than 50% from their post-2020 declines, significantly reducing the upside potential even if a recession materializes. Historically, bond yields have fallen by around 200 basis points (bps) during recessions. Since their recent peak in October 2023, 10-year Treasury yields have already dropped by 140 bps. With this substantial decline already priced in, the potential for further yield declines appears limited. Moreover, inflation remains elevated, and the timeline for any potential recession is uncertain. The market may find it difficult to price the Fed funds rate below 3%, which Philadelphia Fed President Patrick Harker recently suggested as the new long-term neutral rate.
2. Declining Convexity Appeal:
Bonds tend to perform well during recessions due to their positive convexity, meaning prices rise more as yields…
