Have Treasury Yields Peaked?

Executive Summary

Treasury yields have dropped sharply in recent sessions, reviving a question that seemed premature just three weeks ago: Have rates peaked? The answer hinges on which of two narratives prevails. In one, a slowdown tied to the AI selloff and the Iran conflict restores bonds’ role as a safe haven and pushes yields lower. In the other, energy-driven inflation reasserts itself and the rally fades. The early evidence leans toward the first, but the most rate-sensitive parts of the market have yet to confirm it.

Long-end Led Rally

The benchmark 10-year yield traded near 4.97% on Monday, down from a 5.31% closing high on Oct. 5. The decline included a drop of roughly 17 to 19 basis points on Oct. 22, its largest one-day fall in more than a year, as investors fled technology stocks. The pullback comes after an extraordinary run: Treasury yields posted their sharpest quarterly rise since 1994 in the third quarter, and the 10-year jumped 50 basis points in September alone to 5.25%, its highest month-end level since 2002. Even after the latest rally, the 10-year remains more than 100 basis points above its level of a year ago.

The uptrend that began with the outbreak of the war has not clearly broken. In late June, the 10-year briefly fell below its 50-day moving average, now around 4.98%, before rebounding to new highs. A repeat would mark the current move as a pause rather than a peak.

The 30-year bond offers a stronger signal. Most sensitive to long-run inflation expectations, it traded near 5.29% on Monday, about 44 basis points below its recent intraday peak and below its 50-day average, now around 5.37%, putting September’s support in reach. The long bond now sits at about 66% of its one-year trading range, compared with 74% for the 10-year and 82% for the 2-year. Prediction markets put roughly a 60% chance on the 30-year falling below 5.20% before 2027, up 22 percentage points in a week.

2-Year Holds the Line

The policy-sensitive 2-year note has been far more stubborn. It closed last week at 4.69%, about 23 basis points below its recent high of 4.92% and still above its 50-day average. Given the sharper decline in longer yields, the spread between 2-year and 10-year yields narrowed to about 27 basis points from 32 a week earlier.

The 2-year still sits about 80 basis points above the midpoint of the Federal Reserve’s 3.75% to 4% target range, a gap that reflects expectations for at least one more rate hike. Futures price about a 91% chance the Fed holds rates on Wednesday, with a December increase still expected. A break below 4.5% in the 2-year would signal that investors are pricing out that hike, likely pulling longer yields down further.

Real Yields Did the Work

Inflation-protected securities show what drove the rally. Between Oct. 21 and Oct. 26, the 10-year nominal yield fell about 16 basis points, from 5.13% to roughly 4.97%. The 10-year real yield fell about 12 basis points, from 2.76% to 2.64%, while the breakeven inflation rate slipped just three basis points to about 2.34%. In other words, about three-quarters of the move reflected lower growth expectations, not reduced inflation fears.

At 2.34%, the breakeven rate sits near its recent average and about 16 basis points below its one-year high of 2.5%, even with consumer prices running 3.7% above a year earlier. A rise toward 2.5% would undercut the bond rally. A stable or falling breakeven, along with a quiet 5-year breakeven, would support the safe-haven case.

Oil Is the Swing Factor

For months, the 10-year yield moved closely with crude oil. That relationship broke last week, when oil rallied and yields fell. Brent settled at $116.72 a barrel on Friday, its highest close since April 29 and a weekly gain of about 6%, after attacks on Saudi energy facilities. That left it within about $2 of its wartime closing peak near $118 in late March and roughly 77% above its level a year ago. Brent eased about 2% to near $110 on Monday.

A decisive, sustained move above $115 could restart the bond selloff. WTI, the U.S. benchmark, settled at $103.27 on Friday and traded near $101 on Monday, leaving a Brent premium of roughly $13 a barrel that reflects Middle East supply risk. WTI sits further below its wartime peak, but a renewed advance would likely put a floor under yields.

A lasting resolution of the Iran conflict, or even a stable stalemate, could spark a powerful relief rally in bonds. That appears unlikely in the near term as Washington and Tehran trade new threats.

Two Scenarios

In the bullish case for bonds, AI-driven equity weakness spreads, the Fed signals patience on Wednesday, and the 2-year breaks below 4.5%. The 10-year could then retest the 4.75% area where it began September, a move that would produce a price gain of roughly 2% on a 10-year note, given its duration of about eight years.

In the bearish case, Brent holds above $115 and Thursday’s personal consumption expenditures report confirms that inflation is broadening. The 10-year could climb back toward 5.3%, erasing the recent rally and costing holders about 2.5% in price.

Positioning for Both Outcomes

The evidence supports a measured approach rather than an all-in bet on lower yields. Adding 5- to 7-year Treasurys in stages near current levels locks in yields not seen in roughly two decades while limiting exposure to an oil shock. The long bond offers more upside, roughly 8% in price for a 50-basis-point decline, but carries about twice the risk if inflation fears return.

Pairing that duration with Treasury inflation-protected securities makes sense while breakevens are mid-range. At 2.34%, TIPS outperform comparable Treasurys if inflation averages more than that over the next decade, a bar that looks low with headline inflation at 3.7%. A 2-year to 10-year steepener offers another way to position for the Fed pricing out its December hike.

Investors should watch clear signals. A 10-year close back above its 50-day average, or Brent sustained above $115, would argue for trimming duration. A 2-year yield below 4.5% and a falling breakeven would confirm the safe-haven case. The Fed’s decision on Wednesday and Thursday’s inflation data are the next tests.

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