Where Do Treasury Yields Go Now?

Where Do Treasury Yields Go Now?

 

Government bond yields have two moving parts – rate expectations and term premia. We argue here that rate expectations are strongly influenced by break-even inflation, whereas term premia and, by association, real interest rates, reflect the supply and demand backdrop for 'safe' assets. Latest data suggest that break-even inflation rates are likely near their highs. In other words, term premia and real interest rates will start to dominate World bond markets. This requires understanding the net supply of 'safe' assets. Together abundant liquidity, accelerating economic activity and a sharp drop in foreign appetite for US paper all mean that nominal Treasury yields should rise by more. Indeed, a straightforward regression model based on these factors still suggests a 10-year yield target of 2-2½%. But….