Is 5% on US Treasuries not the end? Market veteran issues another bearish signal, 10-year yield may rise to 5.3% next year.

A market veteran who previously accurately predicted that the U.S. 10-year Treasury yield would rise to 5% this year has once again issued a bearish signal on U.S. Treasuries. Steven Barrow, head of G10 strategy at Standard Chartered Bank in London, has raised his forecast for U.S. Treasury yields, expecting the 10-year Treasury yield to rise to 5.2% by the end of 2026 and further reach 5.3% in the first quarter of 2027. The 10-year Treasury yield rose as high as 5.01% intraday on Monday. Apart from a brief touch of 5% during the severe market turbulence in October 2023, this key yield has not been able to sustainably break above that level since 2007. With Treasury yields once again hovering near 5%, Barrow believes the structural factors driving global interest rates to remain elevated over the long term have not faded, but are instead strengthening further. It is worth noting that when Barrow first predicted in February this year that the 10-year Treasury yield would rise to 5%, the view was decidedly contrarian at the time. Back then, the 10-year Treasury yield briefly fell below 4%, and investors widely bet that the Federal Reserve would cut rates repeatedly. Since then, however, the market environment has changed dramatically. The U.S.-Iran conflict drove a historic surge in energy prices, inflation pressures reignited, and the market is now even beginning to price in the possibility that the Fed could launch a new rate-hiking cycle as early as this Wednesday. Barrow said: "My structural view is that we are in an environment where interest rates will remain higher for longer." He noted that one important reason making him more confident that the 10-year Treasury yield will break above 5% is that yields have already approached 5% even though recent inflation data has not substantially exceeded market expectations. This means that even without an inflation shock far beyond expectations, the bond market itself is already facing clear upward pressure. Since the Trump administration launched military action against Iran at the end of February, global bond yields have broadly moved higher. Middle East oil and gas supplies have been disrupted, energy prices have risen sharply, and concerns about a renewed pickup in global inflation have intensified. At the same time, the U.S. artificial intelligence investment boom has also become one of the important forces pushing up long-term interest rates. On one hand, AI infrastructure construction has driven an increase in corporate financing and bond issuance, expanding bond market supply; on the other hand, large-scale AI capital expenditure continues to inject demand into the U.S. economy, keeping economic growth and inflation resilient. Barrow has made relatively accurate market calls on multiple occasions in the past. In 2021, he was bearish on U.S. Treasuries; in recent years, some of his forecasts on the dollar and the pound also proved successful. However, he has not been right every time, and previously suffered a losing bet due to the continued weakness of the yen. Although the specific path by which the 10-year Treasury yield rises to 5% has not been entirely consistent with what Barrow envisioned at the beginning of this year, he believes the structural factors driving long-term rates higher are now stronger than ever. These include persistent pressure on global supply chains, the long-term impact of climate change on production and pricing systems, and stricter immigration policies that constrain labor supply. All of these factors could make it harder for inflation to return to the low levels of the past, thereby raising the neutral rate. A key variable for the market going forward will be how the Federal Reserve under Chair Warsh responds to the new inflation environment. U.S. President Trump has continued to pressure the Fed to lower interest rates, but with energy prices surging and inflation risks resurfacing, the policy choices facing the Fed are becoming more complicated. Barrow currently expects the Fed to raise rates at its September meeting and again in December, then hold short-term rates steady until the end of 2027. This means that, if his judgment proves correct, U.S. monetary policy could shift completely from the rate-cut cycle the market had previously hoped for to "higher for longer," or even re-enter a rate-hiking phase. Barrow warned that if the Fed delays action, the problem could worsen further. He said that given the ongoing Middle East conflict, "in my view, all signs still point to higher inflation." For the Treasury market, this also means that a break above 5% in the 10-year yield may not be the end of this round of selling. If energy prices remain elevated, AI investment continues to stimulate economic activity, and the Fed is forced to curb inflation through further monetary tightening, long-term Treasury yields could still continue to rise. According to Barrow's latest forecast, the 10-year Treasury yield could rise to 5.2% by year-end and further reach 5.3% in the first quarter of next year, suggesting that pressure on the Treasury market may not yet be fully released.