Treasury Yields: Where Do They Go From Here?

We expect yields to fall later this year and into 2024 as inflation continues to cool.

Over the past few months intermediate- to long-term Treasury yields have moved higher by as much as 50 basis points,1 despite moderating inflation pressures. Several factors have contributed to the uptrend:

  • The economy has been more resilient than expected, raising concerns about inflation rebounding.
  • There is still a risk for more Federal Reserve rate hikes.
  • Worries that the increasing supply of bonds that need to be issued due to rising fiscal deficits will mean that yields need to rise to find buyers.

While these concerns are likely to linger, we believe that they are largely discounted at current yields, and over the longer term we expect yields to fall. Short-term yields reflect market expectations that there may be one more rate hike of 25 basis points this year, while modest rate cuts are expected in the first half of 2024.

The rise in intermediate- to long-term yields reflects this potential for a "higher-for-longer" scenario. Intermediate- to long-term yields reflect expectations for the path of Fed policy plus a risk premium, or "term premium," to compensate investors for tying up their money for longer periods of time. Consequently, with the Fed now expected to hold its benchmark federal funds rate2 at current levels or even raise it again, intermediate- to long-term yields have moved up. In fact, the rise in yields so far this year has been driven more by the increase in this term premium than by rising inflation expectations.

Markets expect cuts to the federal funds rate in 2024