U.S. Treasury Yields: what's next?

I was reading an update yesterday from the always-excellent and interesting Speevr.com, a financial research firm that excels in what I consider to be off-the-run and insightful financial markets and political commentary.  However, in this instance something rather mundane grabbed my attention.  Speevr is asking its subscribers where the yield on the 10-year US Treasury bond is likely to settle in the coming weeks and months?

It is a relevant question, and not an easy one to answer.  US Treasury yields have fallen off of front page news.  Perhaps this is because the Treasury market has been reasonably stable and yields have been in a narrow range since the beginning of September.  Or perhaps it is because A.I.-driven stock volatility / bubble concerns, and /or the recent “crypto crash” has made the stability of Treasuries rather less interesting.  

The yield on the 10-year US Treasury bond (constant maturity) has not changed more than +/- 20bps from its current level of 4.06% since September 1, more than three months ago.  Volatility in US Treasuries has also settled, now hovering near its three month low as the MOVE volatility index shows below.

Now what?

So the question regarding yields is, “now what?”  It’s an easy question to ask, but of course a difficult question to answer.  I find it especially challenging at the moment given the countervailing pressures on US Treasuries.  As a slight digression, I also find it rather amusing that some arm-chair economists, pundits and many on the Trump economics team think that if the Fed (or any central bank for that matter) lowers its policy rate, it will instantly translate to lower intermediate and long-term yields.  Should this be the case?  In most cases “yes” if the central bank is responding to the same concerns as the broader market.  However, the FOMC “talking heads” are all over the place as far as their views, even though investors overwhelmingly believe that a rate cut is in the bag at next week’s FOMC meeting.  Ordinarily, reducing the policy rate and easing monetary policy should lead to the yield curve shifting down although in this case there are simply too many conflicting and ambiguous signals. 

Mr Trump and his merry men of economic wizards – and a host of investors that are well long stocks and highly value a “Fed put” to fuel this rally – are saying incorrectly that inflation is under control, and moreover, the U.S. economy needs a boost (de facto meaning that the jobs market is slightly fragile).  Not everyone sees it that way, which is why the yields on intermediate and long-term US Treasuries remain stuck at current levels.

Drivers of U.S. Treasury yields

This digression aside, what are the drivers of intermediate and long-term yields?

• Inflationary expectations – Not much needs to be said in this respect, as consumers clearly expect inflation to remain elevated.  The Federal Reserve Bank of New York’s Survey of Consumer Expectations (Nov 2025) reports that consumers believe inflation will be 3.2% in the year ahead, and at 3.0% over three- and five-year time horizons.  The University of Michigan Survey of Consumers (Nov 21, 2025) also shows that inflation expectations remain elevated and very concerning to consumers, as the excerpt from the “Final Results for November 2025” suggests:

  
  

  “Year-ahead inflation expectations inched down from 4.6% last month to 4.5% this month. This marks three consecutive months of declines, but short-run inflation expectations still remain above the 3.3% seen in January. Long-run inflation expectations softened from 3.9% last month to 3.4% in November. These expectations are now modestly above the 3.2% January 2025 reading. Despite these improvements in the future trajectory of inflation, consumers continue to report that their personal finances now are weighed down by the present state of high prices”.

  
  

  As an aside and certainly relevant to the Federal Reserve’s upcoming monetary policy decisions, the target inflation target of 2% is not within reach if consumers turn out to be correct as far as their expectations.  These expectations are putting upward pressure on US Treasury yields regardless of what the Fed does next.  In fact and perhaps rather convolutedly, further easing by the Fed could push intermediate and long-term yields higher, not lower, should inflation expectations remain unanchored.

  
  

• Concerns about U.S. debt and annual deficits – Similar to inflation expectations, little needs to be said about the U.S. fiscal situation since it is bad and will surely worsen.  Again, the Trump Administration paints a distorted picture claiming that tariffs are reducing deficits, without providing any commentary on the effect of higher prices on consumers who are bearing the major brunt of ill-advised economic and trade policies.  The numbers speak for themselves.  According to FiscalData at Treasury.gov., the deficit in October – the first month of the new fiscal year – was $284 billion, compared to $257 billion in October 2024 ($27 billion higher).  The current fiscal debt is $38.4 trillion, compared to $35.5 trillion at the end of September 2024 (same website).  The graph below from FRED compares gross U.S. debt to GDP, illustrating that the “trend is not our friend” as the debt situation of the U.S. has worsened during every administration – Democrat and Republican alike – since the last time the U.S. ran a budget surplus during the second Clinton administration in 1998-2001.

• Supply and demand dynamics, U.S. Treasuries – There is plenty of conjecture, which is likely true, that the erratic fiscal and trade policies of the Trump Administration are causing foreign countries to reduce their dependency on U.S. Treasuries (and the U.S. Dollar) as the ultimate safe havens for their reserves.  The fact that the greenback is weaker by 8.4% YtD (although it has improved slightly since mid-summer), and gold – arguably a “substitute” for reserves, even if a small component – has rocketed ahead over 60% since the beginning of the year, is anecdotal evidence.  Circa $9.2 trillion of the total $38 trillion of U.S. Treasuries outstanding are held by foreign governments, with the top three holders being Japan ($1.19 trillion), the U.K. ($865 billion) and China ($701 billion).  Aside from China, most countries seem to be holding steady as far as U.S. Treasuries as a component of their foreign reserves. However, this de facto means that foreign players are holding a lower percentage of outstanding U.S. Treasuries since U.S. debt is increasing so quickly.

• Economic outlook – Macroeconomic theory is relatively clear in the respect that a slowing economy and worsening jobs outlook means that consumer demand for credit is lessening, which puts downward pressure on yields.  Moreover, uncertainty generally drives investors from risk assets like stocks into safe haven assets – including U.S. Treasuries – increasing demand and driving yields lower.  A gradually slowing economy would seem to characterise the U.S. at the moment.  The jobs market feels slightly fragile perhaps, but private sector employment data paints a more nuanced picture.   Advocates on the FOMC for easier monetary policy say that the Fed should get ahead of a potentially weakening U.S. economy.  However, keep in mind that full employment is only one of two parts of the Fed’s twin mandate, which also includes stable prices.  Indeed, herein lies the conflict that seems to be tormenting the Fed at the moment.

  
  

Conclusion

If I were asked to bet on whether yields would go up or down from here, I would have a bias towards higher yields because of the first three factors I mentioned above – long-term inflationary expectations, the worsening U.S. debt situation, and foreign players being less willing to buy new U.S. Treasury bills and bonds.  What could make this prediction wrong would be an unexpected rapid erosion in the jobs market, or some sort of “black swan” event which would dramatically reduce risk appetite and cause investors to pile into U.S. Treasuries for safety.