Will 30-Year US Treasury Yields Climb Higher?

Thirty-year US Treasury yields are likely to remain under pressure in the near term, although strong nominal growth could eventually allow them to fall toward 4.25% rather than 3%.

• Thirty-year Treasury yields are around 5.7%, their highest level since 2002, while elevated energy prices, heavy government borrowing and weak institutional demand are weighing on long-duration bonds.
• Oil prices have risen because of the conflict in Iran, and the resulting inflationary pressure could influence both the Federal Reserve's next rate hike and the level of long-term yields.
• The Fed's September 15–16 meeting indicated that policymakers expected two rate increases this year, with the second likely in October or December, and separated its focus on short-term rates from the long end of the Treasury curve.
• US deficits of roughly 6% to 7% of GDP are close to nominal growth of roughly 6%, implying a debt-to-GDP deterioration of about 1% per year rather than an uncontrolled spiral, although debt sustainability does not guarantee that the market can absorb new issuance.
• Yields of 5.5% or higher appear historically cheap in real terms, but a rally requires a catalyst; with nominal growth around 5%, the 30-year yield could decline to about 4.25%, whereas a return to 3% would likely require a recession or a major growth shock.

Takeaway: Long Treasuries offer valuation support at current yields, but investors should not expect an immediate rally because inflation, supply and cautious pension and insurer demand provide no clear catalyst, while yields near 3% are unlikely without a recession.