Treasury Yields Can Push Below 4%. How to Play It.

A trader works on the floor of the New York Stock Exchange at the opening bell on Wednesday. (TIMOTHY A. CLARY/AFP via Getty Images)

Key Points

• The 10-year Treasury yield has traded between 4.10% and 4.20% since mid-September, but concerns could push yields lower.
• A weak labor market, indicated by a 32,000 job loss in private payrolls, briefly dropped yields to 4.09%.
• Government shutdowns typically lead to a decline in 10-year Treasury yields, averaging 0.020 percentage points in the first week.

The Treasury market looks entrapped as yields trade in a small range, but concerns about a weak labor market and a government shutdown could push yields lower in the near term.

Since the middle of September, the 10-year Treasury yield has traded largely within a range of 4.10% to 4.20%. Yields drop as bond price rise. So existing bondholders want to see yields go lower to raise the value of their assets.

News this morning that U.S. shed 32,000 jobs from private payrolls last month dropped yields briefly to 4.09%, but they turned back higher to close above 4.105%. The initial downward move showed that angst about a weak labor market has the potential to break the trading range for Treasuries as traders gobble up what has traditionally been the world’s safest government debt.

Concerns about a lengthier U.S. government shut down provides additional fuel. In the past 10-year Treasury yields have typically declined following the start of a shutdown. On an average, yields fall 0.020 percentage points in the week after a shutdown and 0.017 percentage points a month later, according to a Dow Jones Market Data team that examined five government shutdowns since 1995.

Yields are “trapped” in a range “that we expect will be departed from in the coming sessions,” wrote BMO Capital Markets head of U.S. Rates Strategy Ian Lyngen. He has a position where he expects the 10-year note yield to move to 4.02% after seeing resistance at 4.05%.

“Momentum still favors equities, but almost every other lens points to safer ground in bonds,” Reflexivity wrote in a note this morning. The key question is how to ease into Treasuries while choosing the right duration strategy for protection and yield, the firm added.

How To Play

As of Sept. 23, there were a record 6.72 million active 10-Year Treasury contracts outstanding, according to Chicago Board of Trade. A lot of money is being bet on where the 10-year yield goes from here.

If you are a short-term trader who has the ability to move in and out fast, the recent low of 4.09% could serve as a short-term support. A break below this point suggests yields could continue moving lower, coming closer to the sub-4% level that has been breached only on five days this year.

The 10-year yield closed below 4% only once this year at the height of tariff uncertainty on April 4.

For investors, the U.S. debt market offers a good hedge as stocks get expensive and more vulnerable to shocks; the iShares 20+ Year Treasury Bond exchange-traded fund, a popular long-duration fund, is up 5.61% year to date, on a total return basis.

Just the same, think twice before over allocating to bonds in your portfolio—bond yields might fall, but not for long, due to deeper market and macro issues.

“Any fall below 4%, if it comes, I’d suggest, will ultimately be reversed,” ING’s regional head of research, Padhraic Garvey told Barron’s. “I’d suggest that fairer value is in the range 4.25% to 4.5%” Garvey said, citing his expectation for core inflation to rise as effects of tariffs, albeit delayed, becoming clearer.

Investors are also digesting the rise of private foreign investors like hedge funds and pension funds who have overtaken foreign central banks as the dominant buyers. They can demand higher Treasury yields at a time of high U.S. government debt.

“Yields could fall into a shutdown, though we expect any decline to be fairly limited.” J.P. Morgan strategists say.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.