Yields Reverse Course

Treasury yields may have reached a durable ceiling near 5.3% as investors reassess bonds as a safe haven and long-term inflation expectations remain anchored.

• Last week, 10-year Treasury prices rose and the yield fell 17 basis points, the largest weekly decline so far in 2026.
• The move reversed the rise that had taken the 10-year yield to around 5.3%, a level that appeared attractive to investors.
• Demand for government bonds increased amid concerns that some AI companies could struggle to service the large debt incurred to finance their growth.
• Yields declined despite hotter-than-expected inflation data, while long-term inflation expectations remained remarkably stable despite the sharp rise in nominal yields.
• Horizon’s decomposition indicates that higher yields this year mainly reflect stronger economic growth and a return toward historically normal real yields rather than an inflation crisis.

Takeaway: Bonds may again provide useful portfolio diversification, but the ceiling in long-term yields depends on inflation expectations staying anchored and investors remaining confident in the Federal Reserve; next week’s policy meeting and Chair Walsh’s comments will be key tests.