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The bond market has been on one heck of a ride over the past few years.
The 10-year Treasury yield moved dramatically in 2022. The benchmark yield ended 2021 at 1.52% and finished at 3.88% last year, giving us a calendar year advance of 2.36%. While the size of the move is quite rare, it is far from unprecedented. That made it one of the highest rolling one-year changes, but still well below the peaks seen in the 1980s.
What to Expect After Steep Yield Increases
The table below displays historical increases dating back to 1963 in the 10-year yield over an annual period, as well as how the benchmark has done in the following year. At relatively small movements upward, there has not been a distinct historical bias toward higher or lower yields in the following year. But as the prior year move increases, it became progressively likely that the 10-year yield would decrease in the next year, as did the typical size of the decline.
Image Source: Zacks Investment Research, Federal Reserve
Considering the magnitude of last year’s move, the 10-year yield has averaged a decline of almost a full 1% over the next year and was lower about two-thirds of the time. We can conclude that yields tend to fall after periods of steep increases. The 10-year yield does appear to have a slight downward trajectory off the highs from last year and was also rejected at recent resistance:
Image Source: StockCharts
Bond investors were expecting a bounce back in 2023 after one of the worst performances from a historical perspective last year. While bond performance hasn’t been terrible, the Fed had other plans in mind, as rate hikes have continued despite one pause. It’s clear now that Fed Chairman Jerome Powell views a resilient labor market and a historically low unemployment rate as validation to hike later today (and likely one more time this year).
Lingering (albeit lower) inflation has negatively impacted fixed income, but we are closer to the end of this cycle than the beginning. Inflation measures have been trending in the right direction for the better part of this year, so it’s likely the Fed is very close to the culmination of this tightening cycle. Lower inflation points to a downward bias on yields. If yields do head lower, it would assist Treasuries and higher quality bonds in a much-needed rebound from a treacherous year last year.
However, we also need to remember that the economy remains on sound footing. If the strength continues and we avoid a recession, yields will likely remain steady, as it gives the Fed more reason to keep short-term rates at higher levels to ensure inflation does not go back to 40-year highs.
Recent Rise in Energy Prices
Another reason Powell may have his foot on the gas is due to the fact that energy prices have come back to the forefront. Oil in particular is closing in on $80/barrel, it’s highest point in three months. The rise in energy prices has helped related stocks experience renewed buying pressure after lagging throughout the beginning of this year. Energy stocks are attractive from a valuation standpoint.
The Zacks Oil and Gas – Field Services industry has come on strong over the past three months, advancing nearly 21% and has begun to outperform:
Image Source: Zacks Investment Research
Also note the favorable characteristics for this group below:
Image Source: Zacks Investment Research
Oceaneering International (OII - Free Report) , a Zacks Rank #1 (Strong Buy) stock, is a component of this industry group and is a leading supplier of offshore equipment and technology solutions to the energy industry. The company provides engineered services and products, as well as robotic solutions to offshore energy, defense, manufacturing, and entertainment industries.
OII stock has more than doubled in price over the past year. Shares have recently broken out to a new 52-week high on increasing volume:
Image Source: StockCharts
Oceaneering International has been on the receiving end of positive earnings estimate revisions lately, which our research has shown to be the most powerful force impacting stock prices. For fiscal 2023, OII EPS estimates have been raised by 6.67% in the past 60 days. The Zacks Consensus Estimate now stands at $1.12/share, reflecting potential growth of 261.3% relative to last year.
Image Source: Zacks Investment Research
All Eyes on the Fed
A 25-basis point hike is all but assured from the Fed later today. While yields have shown a downward bias from a historical perspective after periods of steep increases, a strong economy and lingering inflation may put upward pressure on yields.
Investors will be keeping a close eye on any hawkish commentary from Powell. Keep an eye on a renewed energy sector along with leading stocks like OII.
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All Eyes on the Fed: Final Hike of the Cycle?
The bond market has been on one heck of a ride over the past few years.
The 10-year Treasury yield moved dramatically in 2022. The benchmark yield ended 2021 at 1.52% and finished at 3.88% last year, giving us a calendar year advance of 2.36%. While the size of the move is quite rare, it is far from unprecedented. That made it one of the highest rolling one-year changes, but still well below the peaks seen in the 1980s.
What to Expect After Steep Yield Increases
The table below displays historical increases dating back to 1963 in the 10-year yield over an annual period, as well as how the benchmark has done in the following year. At relatively small movements upward, there has not been a distinct historical bias toward higher or lower yields in the following year. But as the prior year move increases, it became progressively likely that the 10-year yield would decrease in the next year, as did the typical size of the decline.
Image Source: Zacks Investment Research, Federal Reserve
Considering the magnitude of last year’s move, the 10-year yield has averaged a decline of almost a full 1% over the next year and was lower about two-thirds of the time. We can conclude that yields tend to fall after periods of steep increases. The 10-year yield does appear to have a slight downward trajectory off the highs from last year and was also rejected at recent resistance:
Image Source: StockCharts
Bond investors were expecting a bounce back in 2023 after one of the worst performances from a historical perspective last year. While bond performance hasn’t been terrible, the Fed had other plans in mind, as rate hikes have continued despite one pause. It’s clear now that Fed Chairman Jerome Powell views a resilient labor market and a historically low unemployment rate as validation to hike later today (and likely one more time this year).
Lingering (albeit lower) inflation has negatively impacted fixed income, but we are closer to the end of this cycle than the beginning. Inflation measures have been trending in the right direction for the better part of this year, so it’s likely the Fed is very close to the culmination of this tightening cycle. Lower inflation points to a downward bias on yields. If yields do head lower, it would assist Treasuries and higher quality bonds in a much-needed rebound from a treacherous year last year.
However, we also need to remember that the economy remains on sound footing. If the strength continues and we avoid a recession, yields will likely remain steady, as it gives the Fed more reason to keep short-term rates at higher levels to ensure inflation does not go back to 40-year highs.
Recent Rise in Energy Prices
Another reason Powell may have his foot on the gas is due to the fact that energy prices have come back to the forefront. Oil in particular is closing in on $80/barrel, it’s highest point in three months. The rise in energy prices has helped related stocks experience renewed buying pressure after lagging throughout the beginning of this year. Energy stocks are attractive from a valuation standpoint.
The Zacks Oil and Gas – Field Services industry has come on strong over the past three months, advancing nearly 21% and has begun to outperform:
Image Source: Zacks Investment Research
Also note the favorable characteristics for this group below:
Image Source: Zacks Investment Research
Oceaneering International (OII - Free Report) , a Zacks Rank #1 (Strong Buy) stock, is a component of this industry group and is a leading supplier of offshore equipment and technology solutions to the energy industry. The company provides engineered services and products, as well as robotic solutions to offshore energy, defense, manufacturing, and entertainment industries.
OII stock has more than doubled in price over the past year. Shares have recently broken out to a new 52-week high on increasing volume:
Image Source: StockCharts
Oceaneering International has been on the receiving end of positive earnings estimate revisions lately, which our research has shown to be the most powerful force impacting stock prices. For fiscal 2023, OII EPS estimates have been raised by 6.67% in the past 60 days. The Zacks Consensus Estimate now stands at $1.12/share, reflecting potential growth of 261.3% relative to last year.
Image Source: Zacks Investment Research
All Eyes on the Fed
A 25-basis point hike is all but assured from the Fed later today. While yields have shown a downward bias from a historical perspective after periods of steep increases, a strong economy and lingering inflation may put upward pressure on yields.
Investors will be keeping a close eye on any hawkish commentary from Powell. Keep an eye on a renewed energy sector along with leading stocks like OII.