“However you slice it, whether it’s real growth, inflation expectations or term premia, the long-end is going to be pressured,” said Noel Dixon, a macro strategist at State Street who has been predicting that 10-year yields could rise above 5% in 2025.
They are factoring in not only divergent views on how fiscal policy is likely to evolve, but also the Fed’s management of its Treasury holdings. The end of the central bank’s balance sheet unwind, known as quantitative tightening, could lower bond supply and in turn boost demand.
“Even as the Fed is likely to continue lowering the policy rate, pulling front-end yields lower, many of the forces that argue for longer-term yields to remain elevated are still in place: a high neutral rate, elevated rate volatility, the inflation risk premium, and large net issuance amid price-sensitive demand,” a Barclays team led by Anshul Pradhan wrote in a note.
