Treasury Yields Are Surging: Are Inflation Fears Overdone?

If you’re a contrarian investor, you may be excited about the recent surge in Treasury yields. 

The key bond market benchmark 10-year Treasury yield reached 4.7% Wednesday, matching its 2024 high, a level not surpassed since October 2023, when it peaked at 5%, a 16-year high at the time. 

For deeper reference, the 2023 peak came after the Federal Reserve had finally ended the fastest rate hike cycle in history in an effort to vanquish the worst inflation in 40 years. 

Going against the conventional wisdom that Treasury yields and interest rates move in tandem, the 10-year Treasury yield has jumped more than 100 basis points since Sept. 18, when the Fed began cutting rates, which have now totaled 100 basis points. 

The 10-year Treasury’s recent surge may be largely attributed to inflation fears, which have been stoked by worries about the incoming Trump administration’s tariff threats, tax cut proposals, and mass deportation plans, which are all inflationary. 

This week’s job openings report and ISM survey also pointed to a resilient labor market and expanding services sector, fanning the flames of inflation worries higher. 

Why are Treasury yields and interest rates moving in the opposite direction? Are the inflation fears overdone? 

Contrarian View: Treasury Yields May Be Nearing a Peak

For a contrarian investor, today's high Treasury yields present a buying opportunity if they believe the market may be overly pessimistic about the future.  

• Trump policies and inflation: President-elect Trump’s bark has historically been worse than his bite; thus, any eventual tariffs, tax cuts, or immigrant deportation may be much less severe, and thus less inflationary, than the bond market is currently pricing in. 
• Potential for mean reversion: If inflation continues to moderate, the Federal Reserve can resume its rate cutting path, leading to an increase in the price of existing bonds, including Treasuries. 
• Attractive yields: High yields offer a more compelling income stream for investors compared to recent years when yields were at historically low levels. Higher yields will attract more buyers, which can then push yields back down.

Investors should keep in mind that contrarian investing often requires a longer-term investment horizon to allow for potential price appreciation. The economic outlook is uncertain, and there is a risk that inflation may remain stubbornly high, requiring the Fed to cut rates less than expected, or even raise them. 

At the December FOMC meeting, the Fed’s “dot plot,” which forecasts monetary policy for the coming 12 months, revealed two rate cuts are expected, a reduction from previous expectations.  

"Participants expected that inflation would continue to move toward 2%, although they noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated," the minutes of the meeting, which were released Wednesday, stated. 

If inflation and interest rates continue to rise, bond prices will likely continue to decline, as bond prices and interest rates have an inverse relationship.