It is a possibility, says a T.Rowe Price analyst. We haven’t seen that level in 25 years.
By David Enna, Tipswatch.com
The chief investment officer at T.Rowe Price is making a bold prediction: Yields on the 10-year Treasury note could reach 6% in 2025.
“Is a 6% 10‑year Treasury yield possible? Why not? But we can consider that when we move through 5%,” Arif Husain wrote in a T.Rowe Price report. He is predicting the benchmark yield may reach 5% in 2025 before climbing higher. He writes:
I continue to expect higher intermediate‑ and long‑term Treasury yields, steepening the curve as Federal Reserve (Fed) rate cuts anchor short‑term yields.
Husain says the U.S. economy is now in a “calm before the storm.” Here are some of his key takeaways:
- Increases in U.S. government spending and potential tax cuts, combined with a healthy economy, are likely to push Treasury yields higher.
- Decreasing foreign demand for U.S. Treasurys could further elevate yields.
- The incoming U.S. administration creates uncertainty. Policies on tariffs and immigration are potentially inflationary.
Husain sees little chance for a U.S. recession in 2025, which could help ease interest rates. His prediction came just before a too-hot CPI inflation report issued Dec. 11 was followed a week later by hawkish Federal Reserve signals, which sent Treasury yields surging higher.
The 10-year Treasury yield has increased 33 basis points in the month of December. It is a key data point across the U.S. economy, influencing everything from corporate debt to mortgages, even car loans.
Reaction
I agree that yields on the 10-year Treasury note could climb above 5% in coming months. That’s possible, but not a sure thing. We are heading into a time of economic uncertainty as President-elect Trump unveils new policies. Last week’s debt-crisis-gambit was not a good start.
The 10-year Treasury yield closed Friday at 4.52%, but the high for 2024 was 4.70% set on April 25. I’d say 5% would be within reach in the aftermath of any market-disturbing event, even if the Federal Reserve cautiously lowers short-term interest rates in 2025.
“Longer‑term Treasury yields should be increasing, steepening the yield curve,” Husain writes.
What would a 5% 10-year mean for TIPS? If 10-year inflation expectations hold around 2.4% (not desirable) you’d probably see the real yield on a 10-year TIPS rising to 2.6%, or higher, from the current 2.23%.
6% is a lofty target
Let’s look back at the last time the U.S. had a 10-year Treasury note yielding at or above 6%. That was January 2000, another time of market turmoil: A dot-com bubble about to burst, plus mania over the year 2000 crashing computers worldwide, resulting in massive corporate spending to avoid the problem.
Interesting fact: On January 12, 2000, a 10-year TIPS was auctioned with a real yield to maturity of 4.338% and a coupon rate of 4.250%, which probably ranks as the “greatest” 10-year TIPS auction of all time. The inflation breakeven rate was 2.38%, very close to a typical rate today.
At that point, in 2000, TIPS were a very new investment product, with just a three-year history. But it does show that the 6.7% nominal rate of early 2000 was not a reaction to high inflation.
Some facts about that time, 25 years ago:
- U.S. Gross National Product grew at a real rate of 4.79% in 1999, the highest rate for any year since then until the pandemic bounce-back in 2021 at 5.80%. In 2024, GDP is growing at a rate of about 3.1%.
- U.S. inflation increased 2.7% in 1999, which matches the current U.S. rate as of November 2024. In the year 2000, it surged to 3.4%.
- The U.S. unemployment rate at the end of 1999 was 4.2%, which again matches the rate of 4.2% for November 2024.
- The federal funds rate was 5.5% in January 2000, with another 100 basis points in increases coming by May 2000. Today, that rate is effectively 4.3%.
- The U.S. budget deficit in 1999 was … actually, it was a surplus of $126 billion. Hard to believe, isn’t it? For 2024, the U.S. budget deficit is running at about $1.8 trillion.
Looking at these factors, except for the strong GDP growth of 1999 and higher short-term interest rates, you could almost assume longer-term interest rates should be higher in 2025 than in early 2000. Inflation rates and unemployment rates are quite similar. But the size of the U.S. budget deficit heading into 2025 is massively higher.
Getting the federal deficit under control should not be a Democratic vs. Republican issue, or liberal vs. conservative. It has to be done, either through spending cuts or tax increases or a combination of the two. It will take a brave politician to advocate for either. Husain writes:
With the Trump administration promising to cut taxes, there is little chance that the deficit will meaningfully decrease. The Treasury Department will need to continue to flood the market with new debt issuance to fund the budget deficit, pressuring yields higher.
I think a yield of 6% still looks unlikely in 2025, but if nominal Treasury yields surge above 6%, the nation’s problems will only get worse.
Click here for a .pdf version of Husain’s report.
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David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. I Bonds and TIPS are not “get rich” investments; they are best used for capital preservation and inflation protection. They can be purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.
Treasury Inflation-Protected Securities 
sir, please can you put a update to your year 2022 article with respect to current year 2025 rates, https://tipswatch.com/2022/11/20/i-bonds-vs-tips-right-now-its-clearly-advantage-tips/
thanks, greatly appreciate.
Since the entire TIPS real yield curve, from 5 to 30 years, is currently 2.07% or higher, TIPS still have an advantage over I Bonds with a real yield of 1.2%. That’s a pretty big spread.
Hello David –
I have read or heard that if someone dies and they do not have beneficiaries on their savings bonds, that it becomes a mini nightmare for the heirs of the estate. Do know much about the problems that this situation would create? Or if anyone else has some insight that would be appreciated as well. Thanks.
I would expect the process of closing out a TreasuryDirect account will take time. Co-owners (such as spouses) should be OK. If a person dies and there are no beneficiaries, the I Bonds go to the estate. If the amount is over $100,000 it goes to probate. More information: https://www.treasurydirect.gov/savings-bonds/manage-bonds/death-of-owner/
Suggestion for a future column:
By month, what are the seasonal adjustment factors ?
Seasonally adjusted CPI numbers are widely published when released, but unadjusted numbers are buried in the details if at all.
TIPS pay on the UNadjusted CPI numbers.
Knowing the month by month CPI adjustment (Dec -.05, Jan +.03, etc) would help in deciding whether to buy April 2026 or October 2026 TIPS.
I hope you are enjoying the Holidays !
I agree that it would be useful to see this charted out to see what the trends have been in recent years.
I don’t think the predictive ability of these past numbers will be as exact as you might like, however. The seasonal effects come in at the component level of the CPI calculations, not on the topline number. Each CPI basket component has a different monthly index, but they are not all seasonally variable in the same way (or seasonal at all). The topline adjustment really depends on which components have been higher or lower and by how much.
This is correct. So to track the adjustments you’d have to do it for every single price category index that is part of the CPI. Gasoline costs, for example, or apparel prices have seasonal patterns that the adjustments smooth out.
David, you state that getting the federal deficit under control has to be done. Why, exactly? This is a commonplace that is not borne out by real-world results. Clinton was the last president to get to a surplus. GW Bush quickly got rid of it. As Abba P. Lerner stated in his 1943 description of functional finance, if a government wished to decrease aggregate demand, it should decrease government spending or raise taxes. He stated that fiscal policies should be judged not on whether they are “sound” or “unsound” but rather on the results of such policies.
There is all kinds of excited talk flying around at the minute, but it would be surprising to see anything happen to actually reduce aggregate demand. Who could we see deliberately starting a recession, either by raising taxes (unlikely) or cutting spending in a meaningful way (even more unlikely). I expect a big tax cut in 2025 without actual offsetting reductions in spending.
Perhaps I am wrong and we will see an American rerun of the Liz Truss budget omnishambles.
The more useful lens on the deficit ties the public debt to the private surplus, as clearly stated in Stephanie Kelton’s The Deficit Myth. A public surplus requires a private deficit. As does getting balanced from here. Who wants that?
Cap, the real problem arises when the interest on the debt becomes unbearable. I also could see a big tax cut in 2025, with little in meaningful spending cuts. Don’t tax overtime, tips and Social Security, plus cuts in corporate and personal rates. A blueprint for disaster. If you want to believe deficits don’t matter, you are pushing the liberal monetary policy that led to 9% inflation very recently. It’s a fairy tale, in my opinion. Hope you are right, though.
How would we get those high rates?
We had recent inflation because of supply bottlenecks and opportunistic margin expansion. It was caused by the real economy, not big balances on one side or another of double entry bookkeeping. As Kelton says, “Their deficit is our surplus.”
I suppose we could see supply bottleneck surprises in 2025 that would cause inflation, or a surge in aggregate demand could outstrip the ability of the real economy to supply demand. Maybe. Perhaps the Fed will hike earlier in 2025 to get ahead of inflation. That would be exciting. Both the Chinese and European economies are slowing. The US will continue to be a popular place to park money.
Seems it all very much turns on inflation. 20 year treasury bond yield is currently 4.8%. When Powell dropped 50 basis points in September, the 20 year treasury bond yield was 4.1% The more the Fed cuts for little or no reason, the more long term bond holders see that this is stimulating the economy, and hence higher inflation. If the Fed cuts again, the 10 and 20 year treasuries will easily exceed 5.0%. If they cut yet again, I could see 6%.
Before the Fed starting cutting, I theorized that cuts in short-term rates would lead to at least a stabilization in mid- and longer-term rates because the yield curve would steepen … until a recession sets in, which hasn’t yet happened. I would say we are overdue for a recession and a problem-ish decline in the stock market. But I am often wrong.
But in fact long term treasuries’ yields have skyrocketed, for the reason I suggest.
Good article, thank you David. Happy Holidays!
I am in the camp that a 6% Treasury bond is very possible, perhaps even likely for many of the reasons cited above, plus others.
We oldsters that have followed the markets for 40+ years understand there was an incredible secular bond market bull run from 1982 to 2020. Just pull up a FRED chart for the 10 year Treasury yield and look at how low it was and still is in perspective of history. And it shows yields may have reached a secular bottom during Covid.
I happen to follow Elliott Wave Theory (Robert Prechter and Avi Gilburt) – I know controversial and not mainstream – and they both see a longer-term bear market for Treasuries unfolding, although Gilburt is bullish short term. If you don’t believe in Elliott Wave, and want a more fundamental view, check out Jim Grant’s Interest Rate observer and some of his wise interviews on the web for a great perspective.
As you know, I am a fan of TIPS and a ladder holder, and have written several articles on SeekingAlpha about them, which you also graciously referenced here on your excellent site. FYI, I provided an update there this week. At 2%+ yields on TIPS look good to me but I do have concern real yields could move higher eventually as normal rates of the 1980’s and 1990’s were closer to 3-4%. Nonetheless my ladder is built and I am holding for many years to come.
Hello Ralph, I got a Google alert about your SeekingAlpha article, but unfortunately I now live outside the paywall and couldn’t read it. I get the feeling that the future trend of interest rates is going to be decided in the first year of the Trump administration. If we see actual moves to stabilize the deficit, things should calm down. But as I always say, the easiest moves for politicians are 1) cut taxes and 2) raise spending.
Another factor that could boost real interest rates beyond present expectations could be a replay of the unexpected 1990s upside growth surprise (AI spillovers). If in that growth environment the Fed keeps short rates too low for too long and/or the present US fiscal madness continues and/or Trump’s weird policies get implemented, we could be in for a full decade of Make Inflation Great Again.
Aka – a continuation of the last 4 years?
In that case, 5 percent average inflation like during 2021-24 will (retroactively) be seen as price stability.
If this were to happen, is it safe to assume that medium-term treasuries and TIPS would also move significantly higher? The 5-year T-note yield was similar to the 10-year in early 2000, but that may have been partly influenced by the 6.5% federal funds rate at the time.
I’ve been wondering for a while now if nominal and real yields will eventually eclipse their October 2023 highs. If real yields climb above 3%, we may even see the return of 2% fixed rate I Bonds. Time will tell…
It’s been surprising how long those October 2023 highs have held. But at that point the Fed was still in “rate hike” mode, with a final hike in July 2023 and no cuts until September 2024. It does seem like a bond-investor revolt is happening right now.
Rick Santelli was on CNBC about a year ago charting out a path to 13% on the 10-yr in the next 6-7 years, purely from technical analysis. Husain is part of a growing cohort of alarmists that may very well be right (it’s always nice to be early on a call), but considering how much the Fed has interfered with the Treasury market since 2008, it seems more like they’d prevent that from becoming a reality, considering the interest on the debt burden (unless Treasury starts refinancing on the long end as Bissent is signaling). In recent view however, the 10-yr is now only about .25 basis points higher that it was in Oct 2022 during a period of very high inflation. It has essentially went nowhere for the past 2 years. Unless inflation goes parabolic again (which most likely will not happen because energy prices will probably remain low), it’s hard to imagine a rapid spike in the 10-yr. to 6%. It may very well gradually tick up, but officials would panic and adjust policy because politicians will never get religion about debt and lack the courage and political will for sacrifice. We live in a bailout culture now.
There is a third and much more dangerous way to reduce the Federal deficit-the so-called “soft default” or inflating away the deficit. Sustained yields of 5 or 6 per cent might accomplish that but the risks are enormous.
While the “debt ceiling” kerfuffle was going on, Congress passed a bill eliminating the WEP and GPO which reduced the Social Security payments of public employees. This is expected to add $196 billion over 10 years to the cost of the Federal government’s largest mandatory program, Social Security. The bill passed overwhelmingly with bipartisan support and Trump’s blessing.
Despite the public rhetoric, there is little support to cut mandatory programs. I expect they will try to transfer some discretionary programs to the states, in Education, for example, but the gains will be minimal at best.
Good post. I think we started soft default with COVID (2020) with inflation running 5-6% now (actual inflation; not USG stats with substitution and hedonic adjustments) thus outpacing bond returns. Hence smart money moving to RE, Gold, Crypto (did I say “smart”), Equities, etc. Although CRE is in the dumps.
Good news is all other currencies are in trouble too so dollar isn’t falling but standard of living is as non-imported goods become more expensive (homes, education, healthcare). AI could revolutionize education but for unions.
Surprisingly, Germany seems to be canary in coalmine for poor public policy (green energy mania) while Spain/Greece chug along at an albeit lower standard of (material) living with better weather and spirit!
“There is little support to cut mandatory programs.”
There is a cap on the amount of wage/salary income subject to the tax which supports Social Security.
A report, now 14 years old, by the Senate Committee on Aging, exploring ways to cure Social Security’s long-term funding issues, found that the elimination of that cap would–by itself, without any other changes in the Social Security program–solve Social Security’s funding shortfall for 75 years.
https://www.govinfo.gov/content/pkg/CRPT-111srpt187/html/CRPT-111srpt187.htm
Since the wealthy derive a disproportionate amount of their income from real estate and assorted paper instrument speculations, another way to solve Social Security’s funding would be to impose the tax on all “income” instead of just wage/salary, i.e., actually earned, income.
Many people depend on Social Security for a financially livable retirement or disability, and IMO people who talk about cutting mandatory programs, instead of increasing programmatic funding more equitably, are revealing an agenda without naming it.
Although not as high as the payroll tax investors with income over a base amount already pay a Net Investment Income Tax of 3.8% on their passive income, i.e. such things as
any effects on I BONDS to expect ?
If real interest rates rise and stay elevated, the I Bond’s fixed rate may also rise – assuming the Treasury continues to use the 5-year TIPS yield as a benchmark for setting the fixed rate.
The current estimated formula is 65% of the 6-month average 5-year TIPS yield. For a fixed rate of 1.4%, the 5-year TIPS would need to average about 2.1% over the Nov-Apr or May-Oct rate setting period. For the fixed rate to reach 2%, real yields would need to average at least 3%.
I believe this is accurate, based on a decade of Treasury decisions. But future decisions could be subject to change.
In the spring of 2024, Bill Gross made the prediction that the 10 year treasury would reach 5% sometime before year’s end. He will end up being wrong unless there is a strong selloff in the bond market in the next week.
Bond vigilantism is getting some discussion in media circles like NPR and WSJ. As best I can discern, these are entities that purchase large quantities of treasuries and can move Treasury yields by substantially altering their purchase offers. The NPR story suggested that the bond vigilantes will have “arrived” when a Treasury auction result ends with a much higher than expected yield.
It could be a good way to destabilize, at least to a degree, the US economy. How much in US bonds does China own? I think it’s a pretty big chunk, if my memory serves me correctly.
That would entice me to exit high yield bonds.
Unless inflation is running very high, a 6% 10-year Treasury would also pull a lot of money out of the stock market.