Analyst Sees 10-Year Treasury Near 6% as Real Yields Climb

NEW YORK — A 10-year Treasury yield of 6 percent is no longer a fringe forecast for at least one market analyst, who argues that steadily rising real yields, not inflation expectations, are doing the work in the bond market. Michael Kramer, writing on Investing.com after the Federal Reserve’s September minutes, estimates the 10-year nominal yield at about 5.8 percent to 6 percent, close to where the forward curve already sits.

Key takeaways

• The 10-year yield finished Wednesday roughly flat near 5.29 percent after a 10-year auction that drew solid demand, according to Kramer.
• He puts the 10-year real yield just under 3 percent and the 10-year real yield starting in 10 years at about 3.5 percent.
• With breakeven inflation near 2.3 percent, those real rates imply a nominal 10-year yield of about 5.8 percent to 6 percent.
• The Fed’s minutes, released Wednesday, say the rise in longer-term rates was mostly a real-yield story.

Why real yields matter

A nominal Treasury yield is roughly the sum of a real yield and the inflation compensation investors demand. When the nominal yield rises because inflation expectations are climbing, the bond market is signaling worry about prices. When it rises because the real component is climbing, it signals something different: investors want more return after inflation, whether because policy is tightening, growth looks stronger or the supply of government debt is heavy.

The Fed’s own account of the September 15-16 meeting points in the second direction. The minutes say real rates accounted for most of the rise in longer-maturity yields, while inflation compensation drove most of the increase at shorter maturities. Nominal yields across the 2- to 10-year segment rose about 35 basis points during the period under review.

The forward-rate argument

Kramer builds his case on forward real yields. He puts the 10-year real yield just under 3 percent, the 10y10y forward real yield, meaning the rate for a 10-year real investment starting a decade from now, at about 3.5 percent, and the equivalent rate starting 20 years out near 3.7 percent. He notes both forwards have climbed steadily since late 2022. Adding breakeven inflation of roughly 2.3 percent yields his 5.8 percent to 6 percent estimate, in line with a 10y10y nominal forward rate of about 6.1 percent.

This is one analyst’s reading, and a forward rate is not a forecast: it reflects expected policy and term premium together and can reverse quickly. It does show the arithmetic behind the argument for a higher path.

The minutes and the auction

Kramer reads the minutes as hawkish and suggests the committee could consider another hike before year-end. The minutes say most participants expected another increase by the end of the year, depending on data, and that several viewed policy as not restrictive or only mildly restrictive with inflation above target. A few participants also cautioned that the three-month change in core PCE inflation, which has declined materially since the start of the year, is more volatile than the 12-month measure.

On supply, the Treasury sold $39 billion of 10-year notes Wednesday. According to TreasuryDirect, the sale cleared at 5.300 percent with a bid-to-cover ratio of 2.77, the highest of the last four 10-year auctions. The Desk, meanwhile, paused its reserve management purchases of Treasury bills, with the pace to be reviewed monthly.

What to watch

A $22 billion reopening of the 30-year bond is scheduled for Thursday afternoon, and September consumer price data are due later this month. If real yields stay near current levels, the forward curve gives a rough map of where the 10-year could settle, but a softer inflation print or weaker demand for term would test the case for 6 percent.