Client Question about Bond Rates

A client recently asked if the risk for higher rates in the bond market for the foreseeable future is meaningful.  I’ll give you several reasons why a fall in rates is unlikely.  

Any casual reader of R.L. Robinson posts knows that there is a meaningful risk that bond yields remain elevated or rise further over the next several months – or even years, but that doesn’t mean that yields will rise continuously from here.  Remember, Bond rates, like stock prices, rarely move in a straight line.

As of today, the setup for higher rates and lower prices on bonds is unusually important because the recent rise in yields is being driven by more than just expectations for Fed policy.

Why yields will keep rising

1. Fiscal deficits and Treasury supply are probably the biggest structural issue.
The U.S. is carrying close to $40 trillion of debt, and investors are demanding higher compensation to absorb the enormous amount of Treasury issuance. The 30-year Treasury recently moved above 5.2%, its highest level since 2007. 

2. Inflation isn't convincingly back to 2%.
July CPI was 3.4% year-over-year and core CPI 2.5%. That's better than it was, but still above the Fed's target. Meanwhile, oil/geopolitical pressures could push inflation higher again. 

3. Long-term yields aren't entirely controlled by the Fed.
This is important. Even if the Fed stops hiking — or eventually cuts — the 10- and 30-year yields can continue rising if investors demand a larger term premium for inflation, deficits and Treasury supply. That's essentially what we're seeing now: long yields have risen substantially even as expectations for additional Fed hikes have moderated. 

4. Foreign demand may be less supportive.
Japan and other major foreign investors are facing higher yields in their own markets, making U.S. Treasuries somewhat less uniquely attractive. That can add pressure to U.S. long-term yields. 

But there's an important counterargument

Higher yields themselves eventually become self-correcting.

At some point, 5%+ long-term Treasury yields become attractive enough that pension funds, insurers, foreign investors and other institutions step in and start buying.  This will keep a lid on rates to some extent. And if higher borrowing costs slow the economy substantially, inflation should eventually fall, creating conditions for lower yields.

There's already evidence that the economy is softening July job losses and weaker retail activity have caused most economists in a recent Reuters survey to expect the Fed to keep its policy rate at 3.50–3.75% through year-end.  While we may not support this conclusion (we still think the Fed raises rates by 25 basis points at least once in 2026) because we don’t see a meaningful slowdown in economic activity over the next 12-months or so.

So, I would distinguish between:

The key distinction: short vs. long bonds

If you're asking because you're considering buying bonds now, this distinction matters enormously.

2-year yields: mostly driven by expectations for Fed policy.
10-year yields: Fed + inflation + growth + term premium.
30-year yields: increasingly dominated by inflation expectations, fiscal deficits, Treasury supply and investor demand.

Right now, the long end is the part I'd be most cautious about. The 30-year yield has been around 5.2–5.3%, while the 10-year is around 4.7%. 

And there's an interesting implication: you don't necessarily need to wait for yields to peak to start buying bonds. If you're investing for income and can hold to maturity, today's yields are considerably more attractive than they were a few years ago. But if you're buying long-duration bonds specifically because you expect yields to fall, timing matters enormously.

My base case: yields probably remain structurally higher than the ultra-low rates of the 2010s, with considerable volatility. I would assign a meaningful probability to another upward move in the 10- and especially 30-year yield, but I wouldn't make a straight-line "yields will keep rising" bet.

If you’re thinking about bonds for your portfolio, medium term bonds are relatively attractive at current yields.  Of course. you’ll want to hold until maturity to mitigate further yield increases – which of course, cause bond prices to fall.  

If you’re considering a 30-year Treasury, I’d hold on those for the moment.  Yields have higher to go, and timing is more important on these issues.  Holding long-term bonds while interest rates are climbing can be hazardous to your financial health.