Larry Summers Predicts 10-Year Yields Will Hit 4.75% Or Higher In Next Decade As Economy Shifts To 'New Era'

Author: Piero Cingari | August 16, 2023 03:33pm

Lawrence Summers, who previously served as the U.S. treasury secretary in the Clinton administration, has recently voiced concerns regarding the potential rise in 10-year yields, anticipating them to be significantly higher than what we’ve seen in the last 20 years.

The expected increase in government budget deficits will likely draw more attention from investors, Summers said in an appearance on Bloomberg Television’s “Wall Street Week” with David Westin.

Summers stood among the earlier forecasters of an economic “overheating” preceding the surge in inflation during 2021.

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The former treasury secretary, now a professor at Harvard University, offered an interesting breakdown of the 10-year yields into three components:

• Inflation, which he predicts will rise faster than before, possibly at 2.5%.
• A real return of 1.5% to 2%, influenced by the government’s growing borrowing needs. This includes factors like increased defense expenditures, potential extension of some tax cuts from the Trump era and rising interest costs on existing debt.
• A term premium, which compensates investors for choosing long-term securities over short-term ones. Summers estimates this to be between 0.75 to 1 percentage point.

Combining these factors, Summers suggests that investors might be eyeing a 4.75% yield or higher on the 10-year in the upcoming decade.

On the immediate economic future, Summers predicts a robust economy for a short period, but he doesn’t rule out the possibility of a recession in 2024.

After the release of July’s FOMC minutes on Wednesday, 10-year U.S. Treasury yields rose by 4 basis points to 4.26%, hitting the highest since September 2007. Historically, over the last two decades, these yields have averaged around 2.9%.

The iShares 7-10 Year Treasury Bond ETF (NASDAQ:IEF) declined 0.3%, on track for the lowest close since November 8, 2022.

This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

Photo: Shutterstock.

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