Steven Barrow, head of G10 strategy at Standard Bank, who was the first to issue a 5% forecast in February this year, has raised his year-end target for the 10-year U.S. Treasury yield to 5.2%, with an additional increase to 5.3% expected in the first quarter of 2027. He noted that supply-chain pressures, climate change, and U.S. immigration policies' constraints on labor supply are all intensifying more than before. Meanwhile, the U.S. dollar index posted intraday gains of up to 0.6%, poised for its best single-day performance since June 17.
U.S. Treasury bonds have faced another sharp sell-off, with the 10-year yield breaching the 5% threshold on Monday—the highest level since 2023—as inflation concerns and supply-side pressures converge to weigh on global bond markets.
On Monday, the 10-year yield climbed as high as 5.01%; the last time it breached 5% was in October 2023, only to retreat the following day.
This time, the U.S. dollar strengthened in tandem, with the Bloomberg Dollar Spot Index posting a daily gain of up to 0.6%, on track for its best single-day performance since June 17, while all G10 currencies declined across the board.
The sustained rise in yields is exerting dual pressure on both the stock market and the economy. As the benchmark for global government and corporate debt, an increase in the 10-year U.S. Treasury yield will drive up borrowing costs, weigh on overvalued equity assets, and drag down economic growth.
The market has now priced in the possibility that the Federal Reserve could begin raising interest rates as early as September 16, while U.S. Treasury bonds may post their first annual loss since 2022.
Goldman Sachs, TD Bank, and other institutions have raised their year-end U.S. Treasury yield forecasts.
After the U.S. Consumer Price Index (CPI) released last Friday pushed the market's implied probability of a Fed rate hike to around 90%, interest-rate strategists at Citi, Goldman Sachs, and JPMorgan have all shifted to forecasting that the Fed may raise rates this week.
Several institutions have also raised their forecasts for year-end U.S. Treasury yields. Goldman Sachs strategists have revised their year-end 10-year Treasury yield forecast from 4.40% to 4.75%, while TD Securities has raised its estimate from 4.25% to 4.75%.
In a report dated September 11, TD Securities strategists including Gennadiy Goldberg noted that, given the market's substantial pricing in of Fed rate hikes, yields are unlikely to surge sharply or spiral out of control. However, barring any signs of economic deterioration, yields are expected to remain broadly elevated through 2027.
Strategists at the Bank of Montreal also said they have lowered their bullish outlook for 10-year U.S. Treasuries, now expecting a yield of 4.6% by year-end, and the possibility of a drop to 4.0% before year-end has been ruled out. The bank remains moderately optimistic about U.S. Treasuries in the medium term, but its near-term targets are no longer as aggressive as before.
The 5%‑Accurate Strategist: The Sell-Off Isn't Over Yet
Steven Barrow, head of G10 strategy at Standard Bank, who was the first to issue a 5% forecast in February this year, said the sell-off is far from over. He raised his year-end target for the 10-year Treasury yield to 5.2% and expects it to climb further to 5.3% in the first quarter of 2027.
When Barrow issued a 5% forecast in February this year, the market widely expected the Federal Reserve to cut rates consecutively, and the 10-year Treasury yield was then below 4%, making his call highly contrarian. Today, developments in Iran, energy price shocks, and inflation data have all corroborated his outlook, further bolstering the credibility of his bearish stance.
He emphasized that the long-term structural forces driving interest rates higher— including pressures on global supply chains, the ongoing impacts of climate change, and the constraints on labor supply resulting from tighter immigration policies—are now stronger than ever. Barrow stated:
"My view on the structural outlook is that we are in a regime of 'higher interest rates for longer.'"
He expects the Federal Reserve to raise interest rates once in September and once in December, after which it will keep short-term rates unchanged through the end of 2027.
Goldman Sachs' Contrarian View: Earnings Growth Is the Key to a Bull Market
The broad-based rise in long-term interest rates has directly pushed up discount rates and compressed equity risk premia, placing valuation pressure on U.S. stocks that have remained at elevated levels.
In a recent research report, Goldman Sachs offered a view contrary to the market's widespread concerns: high interest rates are a headwind for the stock market, but they are not the force that will bring the bull market to an end; earnings growth is the key variable determining the trajectory of U.S. equities.
Goldman Sachs believes that as long as earnings growth remains robust and corporate balance sheets stay healthy, the U.S. stock market bull run has a solid foundation to continue. The report shows that the S&P 500's forward price-to-earnings ratio has fallen from 22 times at the beginning of the year to 19 times, indicating that valuation compression has indeed taken place; however, the equity risk premium remains around 3%, and the relative attractiveness of equities versus bonds has not materially deteriorated.
Earnings per share for the S&P 500 are expected to reach $340 in 2026, up 24% year over year, and further climb to $385 in 2027, reflecting a 13% year-over-year increase. In the firm's view, earnings growth—not interest-rate levels—will be the decisive factor shaping the stock market's medium-term trajectory.
Structural forces are pushing up global long-term interest rates.
The immediate trigger for this sell-off came from multiple fronts. Since the U.S. launched military action against Iran, Middle Eastern energy supplies have been disrupted, sending oil prices sharply higher; WTI crude remained above $100 per barrel on Monday, while inflation expectations have risen in tandem.
Meanwhile, August's consumer price index came in higher than expected, further reinforcing market bets on a Federal Reserve rate hike.
With less than two months to go before the U.S. midterm elections, the 10-year yield has risen by more than one percentage point compared with levels before the outbreak of the Iran war. Treasury Secretary Bessent had previously resorted to unconventional measures, such as increasing repurchases of long-term Treasury bonds, in an attempt to push down long-end rates, but the effect was limited, and the selling pressure did not ease as a result.
This round of U.S. Treasury sell-offs is not an isolated phenomenon; rather, it reflects deeper structural pressures. Indicators measuring global government borrowing costs have climbed to their highest levels since 2007, as investors demand higher compensation for holding long-term debt and competition between governments and corporations for capital intensifies.
The U.S. fiscal deficit continues to widen, with the size of the national debt swelling from roughly $4.5 trillion in 2007 to about $32 trillion today, and the federal debt-to-GDP ratio has now exceeded 100%.
Fitch Ratings has sounded the alarm, noting that the United States' resilience to future economic shocks is eroding. The surge in AI infrastructure investment is both adding substantial new supply to the bond market and continuing to inject stimulus into the economy, thereby further intensifying pressure on bond markets.
Zach Griffiths, head of investment-grade and macro strategy at the research firm CreditSights, said, "There are numerous structural factors that make a sustained rise in interest rates the path of least resistance at present." He believes the 10-year Treasury yield could climb further to 5.5%.
The U.S. dollar has strengthened, but analysts remain divided on the outlook.
Rising U.S. Treasury yields have bolstered the dollar, but some strategists remain cautious about the sustainability of its rally.
Meera Chandan, Co-Head of Global FX Strategy at JPMorgan, pointed out that over the past few weeks, the U.S. dollar has underperformed relative to its fundamentals. "Higher energy prices, strong August inflation and employment data, coupled with Federal Reserve Chair Powell's hawkish remarks at Jackson Hole, should have bolstered the dollar, but in reality, it has failed to keep pace."
She maintains a bullish stance on the U.S. dollar, particularly favoring low-yielding currencies such as the Swedish krona and the Canadian dollar.
Elias Haddad, Global Market Strategy Head at Brown Brothers Harriman & Co., cautioned that the U.S. dollar faces asymmetric risks: upside potential is limited in a hawkish scenario, as the market has already fully priced in roughly 100 basis points of rate hikes over the next 12 months; by contrast, any dovish surprise would carry significantly greater downside risk.
In the options market, the one-month risk-reversal indicator for the U.S. dollar index has turned positive for the first time since September 2, signaling that traders are positioning themselves for further U.S. dollar strength.
Editor/stephen