Are U.S. Treasury Yields Set to Decline? Key Variables and Investment Guide

U.S. Treasury yields have been on the rise since the start of 2025. This week, longer-term Treasury yields surged to their highest levels since November 2023, with the 10-year yield peaking at 4.79%. The benchmark 10-year Treasury yield has climbed more than 100 basis points over the past four months, approaching the psychological 5% threshold.

Last Friday's jobs report indicated continued strong economic growth, prompting the Fed to reassess the timing of further rate cuts. On Wednesday, softer U.S. inflation data led traders to lower their rate expectations, causing the 10-year yield to drop 14 basis points to 4.65%.

Vishal Khanduja, head of large-cap fixed income at Morgan Stanley Investment Management, noted the recent "increase in volatility" in U.S. Treasuries.

Khanduja said a significant portion of the rise in the 10-year yield is due to an increase in "real yields," as investors seem to have priced in expectations of strong economic growth without significant inflation concerns. He added that the climb in yields also reflects market worries about the U.S. deficit trajectory, with investors demanding higher premiums for holding long-term government bonds amid fiscal policy concerns.

Donald Trump is set to return to the White House next Monday, with policies focusing on economic growth rather than debt levels and inflation risks. Investors will be watching the next administration's spending plans and how the U.S. will finance its deficit.

Whether the Trump administration will exacerbate inflation is uncertain. Reports citing unnamed officials suggest Trump's incoming economic team is considering a gradual increase in tariffs as a negotiating tactic, which could help avoid a spike in inflation.

Brandywine Global Investment Management portfolio manager Jack McIntyre believes Wednesday's CPI report supports the view among market participants and Fed officials that the next move by the Fed will still be to lower rates. He added that given inflation is a key variable, the 10-year Treasury yield may consolidate between 4.50% and 4.80% for some time.

The rapid rise in Treasury yields prompted Mark Dowding, CIO of RBC BlueBay Asset Management, to suggest it's time to trim some positions. On Tuesday, Dowding closed his bearish bets on long-term Treasuries following last Friday's stronger-than-expected nonfarm payroll report, which pushed the 30-year yield above 5% for the first time since November 2023. He also reduced bets on the steepening of the yield curve between 30-year and 2-year Treasuries.

JPMorgan's latest client survey indicates a rise in bullish positions on bonds to their highest level in over a year, while bearish positions have decreased, signaling a positive outlook for the spot market.

Direct purchases of Treasuries typically have high minimum investment requirements, targeting institutional investors. Retail investors can access Treasuries through ETFs.