After surging to its highest level in more than 20 years earlier this month, the U.S. Treasury (UST) 10-year yield has made a visible U-turn over the last few weeks. Interestingly, the forces we have discussed that pushed longer-date Treasury yields to their recent peaks have not gone away, leaving investors with the quandary of what happened then. In our opinion, the answer is pretty straightforward: there’s a new kid in town.

Who is “the new kid,” or shall we say, force impacting the bond market? Without a doubt, it has been the renewed safe-haven bid for Treasuries among the global investment community stemming from the risk-off AI/tech-related wave of anxieties. This flight-to-quality bid was also enhanced by short-covering from market participants who were positioned for long-term UST yields to rise further.

Figure 1: U.S. Treasury 10-Year Yield

As the above graph reveals, this safe-haven bid was also present before the Middle East war when private credit and business development company (BDC) concerns were dominating the narrative and the UST 10-year yield fell to 3.94%, or 100 basis points below current levels, as of this writing. That is the important aspect to remember for fixed income investors: even with the recent 40-basis-point rally in the 10-year, absolute yield levels are now much higher, with such rallies only producing “higher lows.”

Once things settle down and the safe-haven bid fades, attention will shift back to the four forces we have continued to highlight. So, let’s take a look at where they stand:

• Solid Growth
  • Recent data suggest the labor market is fine and steady: the unemployment rate has leveled around 4.2% and weekly jobless claims remain near multi-decade lows below 200,000.
  • In the third quarter, real gross domestic product (GDP) grew 3.4% and real final sales to private domestic purchasers accelerated by 4.9%.
  • Consumer spending and private investment remain very solid and will give the economy momentum heading into year-end.

Figure 2: U.S. Economic Growth

• “Sticky,” Above Fed-Target Inflation
  • The September readings for the consumer price index (CPI), producer price index (PPI) and personal consumption expenditures (PCE) all came above the Fed’s target of 2%.
  • September core CPI (2.6% year over year) and PPI (6.3% year over year) both came in hotter than expected, while core PCE (3.1% year over year) matched expectations.
  • We expect higher energy prices to keep passing through to other areas and the AI buildout to continue applying upward pressure on prices.

Figure 3: Core Inflation

• The “Warsh-Uncertainty” Factor
  • Removal of forward guidance has created elevated policy uncertainty.
  • Adding to this uncertainty will be the change in the 2027 Federal Open Market Committee (FOMC) meeting schedule, where one meeting will not have a vote or policy statement.
  • As a result, the bond market wants a higher term premium (higher yield compensation).
• Supply, Supply, Supply
  • The U.S. budget deficit rose to just about $2 trillion for fiscal year 2026, and Treasury will need to increase coupon auction sizes going forward.
  • Based on recent Treasury forward guidance, any potential increase in coupon auction size could come by mid-2027 and could be concentrated in the 2- to 10-year sector.
  • Despite higher long-term rates and recent AI/tech-related setbacks, funding needs for the AI buildout will continue to require more debt issuance.

Conclusion

It seems highly likely that the forces which pushed the UST 10-year yield to a more than 20-year high-water mark are not going away anytime soon. While the “new kid in town” may put a cap on rates in the near term, once the AI/tech-related selloff fades, the old-school factors should still have a visible impact on the UST 10-year yield moving forward.