Treasury Yields Likely to Fall After Multidecade Highs, Bessent Adviser Says
A senior Treasury adviser says U.S. Treasury yields are unusually high and likely to fall, citing an Iran war energy shock and AI-related corporate borrowing after 24-year highs.
His comments followed recent moves in which the 10-year and 30-year U.S. Treasury yields reached 24-year highs. Global bond yields have risen as expectations grow that central banks will raise interest rates and corporations continue borrowing to build out artificial intelligence infrastructure. Demand for popular consumer loans such as home mortgages has dropped as borrowing costs increased alongside Treasury yields.
Zervos said the Federal Reserve and other central banks have reacted to short-term rate increases, but longer-term expectations for rates and inflation have not changed much. The Fed last month raised interest rates for the first time in three years. Central bank officials signaled this week that more increases could come before the end of the year. According to CME's FedWatch tool, fed funds futures traders anticipate a more than 82% likelihood that the central bank will next raise borrowing costs at its December meeting.
Zervos said some pressure on global real rates has also come from increased corporate spending on AI. He referred to the technology as "SI," an acronym for "super intelligence," a term President Donald Trump has touted amid mounting local opposition to data centers. Zervos characterized the investments as a positive sign for the economy overall and said their effect on yields is a short-term problem.
He said bond yields are likely to come down after the resolution of the energy shock caused by the U.S. war with Iran. Prices for Brent, the global crude benchmark, climbed about 38% between the beginning of the conflict and Wednesday. "We're just going to have to live with that for a short period of time," Zervos said.
Zervos said the increase in rates is "not a U.S.-specific phenomenon," listing Germany, France, Italy and Japan as countries seeing similar moves. "The U.S. has been kind of a fantastic performer in all this vis-a-vis many other developed markets, developed small markets," he said. "It's not a U.S. problem."