U.S. Treasury Yield Outlook: 10-Year Rates Expected to Rise Gradually Despite War-Driven Inflation Risks
Benchmark U.S. Treasury yields are expected to increase only modestly in the coming months, even as inflation concerns grow following the U.S.-Israel conflict with Iran, according to a Reuters survey of bond strategists. Most analysts have kept their forecasts largely unchanged compared with last month.
Oil Price Surge Adds to Inflation Concerns
The start of the conflict at the end of February triggered a sharp rally in Brent crude oil prices, which jumped nearly 65% and remain more than 20% above pre-war levels.
Although investors initially anticipated a flight to safety into government bonds, the U.S. 10-year Treasury yield has instead climbed about 20 basis points to around 4.16%, reversing the drop in yields seen just before the war began.
Global Bond Yields Move Higher
Rising yields have not been limited to the United States. Government bond yields in the eurozone and the United Kingdom have also increased significantly as investors become less confident that central banks will deliver additional interest rate cuts in the near future.
The Federal Reserve is still expected by many economists to cut interest rates twice this year, but several policymakers have warned that inflation was already running above target before the conflict began.
Robert Tipp, chief investment strategist at PGIM Fixed Income, noted that markets may be too optimistic about the pace of future Fed rate cuts, given persistent inflation pressures.
He added that inflation has remained stubbornly high since the pandemic, suggesting that price pressures may continue to linger longer than many investors expect.
Short-Term Yields Seen Falling Slightly
While long-term yields could edge higher, shorter-term Treasury yields are forecast to decline modestly due to expectations of future monetary easing.
According to the Reuters poll conducted between March 5 and March 11, the two-year Treasury yield is expected to fall to 3.47% within three months and to 3.40% in six months.
Meanwhile, the benchmark 10-year Treasury yield is projected to remain near current levels through May, before rising slightly to 4.20% in six months and 4.25% within a year.
Limited Risk of Another Sharp Yield Spike
Despite recent volatility, most strategists do not expect a major surge in Treasury yields in the near term.
Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management, believes the Federal Reserve may look past the temporary inflation impact caused by higher oil prices.
He expects the 10-year Treasury yield to trade within a range of 3.75% to 4.25%.
Yield Curve Likely to Steepen
Around two-thirds of survey respondents believe the U.S. yield curve will steepen, meaning that long-term yields will rise faster than short-term rates.
Analysts say one reason for this outlook is the lack of a clear plan to control the U.S. fiscal deficit, which totaled $1.78 trillion last year.
Growing government borrowing needs could increase pressure on long-term Treasury yields in the coming years.
Tariff Ruling Raises Debt Concerns
A recent U.S. Supreme Court ruling that struck down parts of President Donald Trump’s tariff policies has also revived concerns about government revenue and borrowing requirements.
Some analysts believe tariffs had provided a steady source of revenue that helped offset the federal deficit, and removing them could add pressure to the long end of the Treasury market.
Bond Strategists Divided on Inflation Pricing
Survey results showed mixed opinions about whether the current 10-year yield accurately reflects inflation risks. Around 41% of respondents believe inflation expectations are underpriced, while about half think yields already reflect inflation appropriately.
Luis Alvarado, co-head of global fixed income strategy at the Wells Fargo Investment Institute, said that although policymakers may prefer lower long-term borrowing costs, bond investors remain cautious due to strong economic growth, inflation expectations, and rising term premiums.
The term premium, which represents the extra return investors demand for holding longer-dated debt, has remained elevated due to concerns about Treasury supply, inflation risks, and central bank independence.
He also noted that the U.S. Treasury has increasingly relied on issuing short-term Treasury bills rather than longer-term bonds, a strategy aimed at meeting funding needs while avoiding further pressure on long-term yields.
