Isn't 5% US debt the end? The market veteran is sending another bearish signal, and the 10-year yield may rise to 5.3% next year

The Zhitong Finance App learned that market veterans who had previously accurately predicted that the yield on US 10-year treasury bonds would rise to 5% this year have once again sent a bearish signal about US bonds. Steven Barrow, head of G10 strategy at Standard Chartered Bank in London, recently raised the US bond yield forecast. The 10-year US bond yield is expected to rise to 5.2% by the end of 2026, and further hit 5.3% in the first quarter of 2027.

The 10-year US Treasury yield rose to 5.01% intraday on Monday. With the exception of briefly touching 5% during intense market fluctuations in October 2023, this key yield has not continued to break through this level since 2007. As US bond yields rise back to around 5%, Barrow believes that the structural factors driving global interest rates to remain high for a long time have not subsided; on the contrary, they are strengthening further.

Notably, when Barrow first predicted that 10-year US Treasury yields would rise to 5% in February this year, this view bucked the trend at the time. At that time, the 10-year US Treasury yield fell below 4%, and investors generally bet that the Federal Reserve would cut interest rates continuously. However, since then, the market environment has changed dramatically. The US-Iran conflict has driven energy prices to soar historically, and inflationary pressure is heating up again. Currently, the market is even beginning to price the Federal Reserve to start a new cycle of interest rate hikes as soon as this Wednesday.

“My structural view is that we are in an environment where interest rates will remain high for a longer period of time,” Barrow said. He pointed out that an important reason why it is more convinced that the 10-year US Treasury yield will break through 5% is that with recent inflation data not greatly exceeding market expectations, the US Treasury yield is already close to 5%. This means that even without an inflationary shock far exceeding expectations, the bond market itself is already facing clear upward pressure.

Global bond yields have generally risen since the Trump administration launched military action against Iran at the end of February. Oil and gas supplies in the Middle East have been disrupted, and energy prices have risen sharply, heightening market concerns about a resurgence in global inflation. At the same time, the boom in artificial intelligence investment in the US has also become one of the important forces driving up long-term interest rates. On the one hand, AI infrastructure construction is driving an increase in corporate financing and bond issuance to expand supply in the bond market; on the other hand, large-scale AI capital expenditure continues to inject demand into the US economy, making economic growth and inflation resilient.

Barrow has made more accurate market judgments many times in the past. In 2021, he was bearish on US Treasury bonds; in recent years, some predictions of the trend of the US dollar and the British pound have also been successful. However, his judgment was not accurate every time, and he had previously bet on loss due to the continued weakening of the yen.

Although the exact path for 10-year US Treasury yields to 5% is not entirely consistent with Barrow's vision at the beginning of this year, he believes that the structural factors driving the rise in long-term interest rates are now stronger than ever. These include continued pressure on global supply chains, the long-term effects of climate change on production and price systems, and stricter immigration policies that limit labor supply. All of these factors may make it more difficult for inflation to return to past lows, thereby raising the center of interest rates.

Next, one of the key variables in the market will be how the Federal Reserve, under the leadership of Federal Reserve Chairman Walsh, will deal with the new inflationary environment. US President Trump continues to pressure the Federal Reserve to lower interest rates, but as energy prices soar and the risk of inflation resurfaces, the policy choices facing the Federal Reserve are becoming more complicated.

Barrow currently anticipates that the Federal Reserve will raise interest rates at the September meeting and raise interest rates again in December, then keep short-term interest rates unchanged until the end of 2027. This means that if his judgment holds true, the US monetary policy may completely shift from the interest rate cut cycle previously expected by the market to “higher and longer,” or even re-enter the interest rate hike phase.

Barrow warns that if the Federal Reserve delays action, the problem could worsen further. He said that considering the ongoing conflict in the Middle East, “in my opinion, all signs still point to higher inflation.”

For the US bond market, this also means that a 10-year yield above 5% may not necessarily be the end of this round of sell-off. If energy prices remain high, AI investment continues to stimulate economic activity, and the Federal Reserve has to further tighten monetary policy to contain inflation, long-term US bond yields may continue to rise. According to Barrow's latest forecast, the 10-year US Treasury yield may rise to 5.2% at the end of the year and reach a further 5.3% in the first quarter of next year. The pressure on the US bond market may not be fully released.