September 15, 2026 I 4 minutes read
10-year Treasury yields are close to 5%, yet investor confidence in bonds has rarely seemed lower. For an asset class that has traditionally served as both an income source and a ballast against equity volatility, that disconnect is striking. In our view, today’s headlines are obscuring the bigger picture. The medium-term outlook may be more constructive than markets currently appreciate.
Looking through a near-term lens, the Treasury bear case is largely a fiscal and inflation story. Investors worry that persistent deficits will add to an already large debt burden and push yields higher. The reality, however, is more nuanced. On deficits, fiscal expansion under Trump 2.0 has been more restrained than many feared. The fiscal deficit, as a share of GDP, has remained broadly unchanged, partly supported by tariff revenues. Moreover, political gridlock after the midterm elections may itself constrain future fiscal expansion. On debt levels, concerns are legitimate. The absolute size of U.S. government debt merits scrutiny. However, debt should also be assessed alongside the size and growth of the economy supporting it. A 5% Treasury yield would be deeply problematic for an over-leveraged economy suffering from weak growth and excess capacity. Today’s United States hardly fits that profile. It remains the world’s largest economy and, over the past five years, has expanded by more than the size of the entire UK economy. Inflation is still an obvious concern given investors’ experience in 2022. However, the current backdrop bears little resemblance to that period. Wage pressures are more subdued, labor market conditions more balanced, and the risk of a repeat of 2022 is materially lower.
Markets do not typically obsess over the same narrative for long. The bigger question over the next 12-18 months is whether the AI boom can ultimately deliver the productivity gains needed to justify the extraordinary capital being invested. Interestingly, both scenarios point in the same direction for Treasuries. If AI succeeds, stronger productivity should help contain inflation. While stronger growth may lift real rates, the disinflationary impact of higher productivity could more than offset that effect, pulling long-term yields lower. Conversely, if the AI story disappoints, an AI capex bust could trigger an equity selloff and a flight to safety — again pushing Treasury yields lower. In other words, the medium-term outlook appears unusually asymmetric for bonds. If AI succeeds, rates may fall. If AI fails, rates may also fall.
While near-term risks remain, we believe today’s headlines are obscuring a more constructive medium-term cyclical setup for Treasuries. However, investors are now being compensated for that uncertainty in ways they were not just a few years ago. Starting yields have historically been among the strongest predictors of future bond returns and, unlike in 2022, policymakers now have considerably more room to cut rates should growth weaken. Importantly, investors do not need to reach for risk to earn attractive returns. U.S. Treasuries remain the world’s benchmark risk-free asset, yet now offer yields close to 5%. Investors should not dismiss that combination lightly. For medium- and long-term investors, the market’s fixation on near-term concerns has strengthened, not weakened, the investment case for Treasuries: income today, potential capital appreciation over time, and diversification benefits should risk assets stumble.
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