Wall Street sees Treasury yields at 6% as structural pressures outlast oil-driven selloff

Oil lit the fuse on the Treasury selloff, but it isn’t what Wall Street expects to keep yields high. The benchmark 10-year has climbed almost 120 bps this year to 5.29%, close to its highest level since 2002, and Pimco’s Dan Ivascyn tells the Financial Times that 6% — a level unseen since 2000 — isn’t a far-off scenario. A Wall Street Journal survey shows economists expect oil to drop below USD 80 / bbl by July and inflation to cool to 2.3% by the end of 2027, yet they see the 10-year still near 4.8% by then. That’s half a point above what they forecast in July.

The oil shock is expected to pass, but the higher cost of US borrowing isn’t. Forecasters now see the 10-year ending this year at 5.1%, up from 4.4% in July, which they attribute to a mix of drivers that has little to do with the oil price. The fiscal picture keeps worsening, with interest on the national debt now exceeding military spending. The AI infrastructure build-out is soaking up capital, and the growth outlook has firmed, with 2026 GDP now seen at 2.4%, up from 2.1% in July.

The Fed has also turned hawkish, raising rates last month for the first time in three years and projecting rates above 4% through 2027. Northern Trust’s Carl Tannenbaum concedes that an end to the Iran war would ease some pressure on yields. Debt worries and AI-driven capital demand would remain, however, and he sees the 10-year at 5.2% through 2028. Decision Economics’ Allen Sinai calls it “a sea change in the fundamentals.” He expects yields near 6% next year and above 5% for the rest of the decade.

The near-term danger is positioning. Oil-driven inflation fears started the selling. What could carry yields to 6% is forced selling, according to Ivascyn. Platform hedge funds and other leveraged players are being stopped out of losing bond bets. Their exits push yields to levels that trigger further selling from holders like REITs, the “vicious loop” investors have been warning about for weeks. 3Q was already the Treasury market’s worst quarter this century.

Where it starts to hurt: Ivascyn draws the line at 5.5%. Beyond it, he expects “decent weakness in risk markets,” in both credit and equities, even with US indices near record highs. The strain is already showing in the weakest borrowers, with junk bond yields hitting 17% this month, the highest since May 2020. US households are feeling it too, weeks before the midterms, as the 30-year mortgage rate reaches 7.4%, a high not seen since 2023. Ivascyn also expects slow-motion trouble in private markets, where commercial real estate and other fragile capital structures are most exposed. Washington’s planning hasn’t caught up. The Congressional Budget Office’s February baseline assumed the 10-year wouldn’t top 4.3% this decade, and the White House budget office sees yields falling into the mid-3% range.

What could cap it: Yields this high eventually draw buyers looking to lock in returns, and this week’s 10- and 30-year auctions saw robust demand. Ivascyn also argues there’s no need to be all-in on US paper. He points to Australia, the UK, Canada, and Germany as offering attractive yields with better fiscal starting positions.

MARKETS THIS MORNING-

Asian markets were mixed in early trading. South Korea’s Kospi was down around 2.2%, and MSCI's broadest index of Asia-Pacific shares outside Japan was largely flat. Japanese markets are closed today.

THE CLOSING BELL-

The EGX30 fell 2.0% at yesterday’s close on turnover of EGP 6.8 bn (40.5% below the 90-day average). Local investors were the sole net sellers. The index is up 24.8% YTD.

In the green: Juhayna (+0.3%).

In the red: Heliopolis Housing (-5.7%), AMOC (-5.1%), and Raya Holding (-4.1%).