Rising Fiscal Woes and Inflation Pressures May Send Treasury Yields Soaring
The US fiscal landscape is expected to worsen, and Donald Trump’s policies may keep inflation elevated, leading to a potential surge in Treasury 10-year yields, according to T. Rowe Price. This could mark the first time yields reach 6% in over two decades.
Fiscal Deficits and Tariffs Stoke Inflation Concerns
Arif Husain, chief investment officer of fixed-income at T. Rowe Price, believes the benchmark yield may first reach 5% in the first quarter of 2025 before potentially climbing further. Husain cites persistent US budget deficits, potential tariffs, and immigration policies that would sustain price pressures as key factors driving this trend.
A Steeper Yield Curve on the Horizon
The outlook for Treasuries has grown increasingly bleak as traders prepare for Trump’s proposed policies to stoke inflation and increase the fiscal strain on Washington. Investors will closely scrutinize the Federal Reserve’s policy statement on Wednesday to gauge how much further interest rates may fall after the expected quarter-point cut this week.
Global Demand for Treasuries Wanes
Falling global demand for Treasuries also bodes ill for their outlook, according to Husain. Japan and China, the largest foreign holders of US sovereign debt, have been selling off their holdings, with Japan selling a record $61.9 billion and China offloading $51.3 billion in the third quarter.
Treasuries Become Less Attractive
Husain sees “little chance” of a recession on the horizon, making Treasuries even less attractive. “It appears that the Fed has successfully guided the economy into an elusive soft landing,” he wrote. As a result, investors may be steering away from Treasuries, which have become more volatile than other high-quality developed market government bonds.
A Bearish Outlook for Treasuries
Husain’s vision for a 6% yield appears even more bearish than some of his peers. ING Groep NV predicts the 10-year yield may test 5% to 5.5% next year, while Franklin Templeton and JPMorgan Asset Management suggest 5% is possible. As the fiscal landscape continues to deteriorate, Treasury yields may be poised for a significant climb.
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