The vexing matter of rising bond yields

Long-term Treasury yields may remain elevated because fiscal debt, data-center investment, persistent inflation and a higher term-risk premium are pushing rates toward historically more normal levels.

• U.S. federal debt has risen above $40 trillion, increasing the supply of Treasuries competing for investor demand.
• Data centers are also competing for capital, while inflation is no longer as subdued as during the post-global-financial-crisis period.
• Ten-year Treasury yields exceeded 5% from 1967 to 1998, suggesting that the low rates of the post-GFC era were abnormal.
• New Fed Chair Kevin Warsh faces a market test; August inflation was neither especially hot nor cool, and the probability of a federal-funds-rate hike reached 85%.
• In a sticky soft-landing scenario, diversified equities tilted toward large-cap quality and international stocks, one-to-three-year bonds and investment-grade credit are favored; in a stagflation-lite scenario, quality and value stocks, ultra-short or floating-rate debt and investment-grade credit are preferred, while small caps and emerging-market debt are vulnerable.

Takeaway: Investors should avoid relying on precise rate-cut timing and favor shorter-duration fixed income, while recognizing that a sustained inflation shock could drive long-term yields higher and a successful disinflationary soft landing could bring them down.