With the four-decade downtrend in yields definitely broken, a new Treasury paradigm may be starting. Over the next decade (or more), we see two realistic possibilities. First, the market could begin a trend toward higher yields, as existed from the late 1950s until the early 1980s. However, this period was a historical anomaly (see next exhibit).
It’s more likely that 10-year Treasuries broadly trade within a 4% range bounded by 2% and 6%. Tight labor markets due to demographic trends and the stock of government debt may keep real yields higher than occurred in the inter-crisis period. Assuming typical business cycles return, the 10-year Treasury yield may sell off toward 6%, while rallying toward 2% as the Fed cuts interest rates. We assume the Fed isn’t again forced to lower rates below 1%.
