Interest rates have problems, but the US dollar has bigger problems

Long-term US Treasury yields may stabilize, but the adjustment to persistent fiscal deficits and heavy issuance could instead occur through a weaker US dollar and renewed imported inflation.

• Treasury buybacks, possible US support for the Japanese yen, attractive real yields and a short-duration market could reduce volatility at the long end of the curve.
• Ten-year TIPS real yields are around 2.4% and 30-year real yields close to 3%, while long-term inflation breakevens are around 2.2–2.4%, levels that could attract pension funds and insurers.
• The US fiscal deficit remains structurally large, Treasury issuance is heavy as maturing debt is refinanced, and AI-related borrowing for data centers, power infrastructure, chips and equipment competes for long-duration capital.
• Higher energy prices, especially diesel and refined products, could reverse recent CPI disinflation; an escalation affecting the Strait of Hormuz could widen breakevens and trigger a renewed bear-steepening of the curve.
• A more credible and hawkish Fed could anchor inflation expectations, but containing yields through buybacks, yen support or curve management would not remove the fiscal burden and could shift more pressure onto the exchange rate.

Takeaway: Investors should allow for a period of technical stabilization in long-term rates alongside a weaker dollar, higher import costs and renewed inflation risk; the outlook would deteriorate further if energy prices push breakevens higher and constrain Fed easing.