Goldman Sachs trading executive Rich Privorotsky said long-dated U.S. Treasuries are now 「completely ignored」 by buyers. The 10-year Treasury yield climbed to 5.34% intraday on Oct. 1, its highest level since 2002, and remained near 5.28% at the close on Oct. 2.
That move came even after August PCE came in below expectations and the September nonfarm payrolls report cooled sharply, prompting markets to cut the odds of another October rate hike from Federal Reserve Chair Waller. In Privorotsky’s view, expectations for short-end tightening have mostly been priced in. The pressure now sits at the far end of the curve, where volatility expectations have already broken away from the tension seen in shorter maturities.
Treasury action has not been enough to draw buyers back
On Sept. 28, the U.S. Treasury said in an official release that Jefferies chief market strategist David Zervos would join the Treasury Secretary’s office as an adviser.
Zervos spent nearly 20 years at Jefferies and began his career as an economist at the Federal Reserve Board. This is his third stint in government. He will serve as a special government employee, a role that does not require Senate confirmation, and told clients he expects to stay until April 2027. In an interview, Zervos said the Treasury is taking back control of debt-maturity management.
That appointment comes after the Treasury doubled long-bond buybacks to $4 billion in August, while yields kept moving higher. The report said Zervos joining the department may signal a more active approach to the issuance mix across maturities, including possible adjustments to the balance between long- and short-dated supply, though officials have not provided details.
Bloomberg macro strategist Simon White said expectations of government intervention only make short positions riskier and do not amount to a sufficient reason to buy. If the market starts betting on official support, investors could end up trapped between those positions.
White flags correlation, volatility and deficit risks
White also pointed to a threshold for the market: if the 10-year yield stays in a 5.25% to 5.50% range for an extended period, stocks and bonds have often started moving in the same direction, reducing Treasuries’ usefulness as a diversification tool.
Higher yields can also lift volatility, tightening margin requirements and position limits. White said periods of rising volatility have historically gone hand in hand with weaker Treasury market liquidity, creating conditions in which selling pressure can feed on itself.
The fiscal backdrop adds another challenge. The U.S. budget deficit as a share of GDP ranks fifth among major economies, behind Hungary, Poland, Brazil and Colombia. Excluding interest payments, the primary deficit ties with the U.K. for the highest position.
Real yields and mean reversion still point to downside for bond prices
White said the main driver in this latest yield surge has been real yields rather than inflation expectations, which have stayed comparatively moderate. His self-built leading indicator for 10-year real yields includes market liquidity surplus, the intensity of tightening by global central banks and the Federal Reserve policy rate. The signal suggests real yields still have room to rise, with a lead time of roughly three to four months.
He also looked at annual total returns for U.S. Treasuries and said they tend to oscillate around a long-term trend mean. In weaker periods, returns often fall through that mean before finding a bottom. Returns are now close to the mean, but White’s backtest over more than 50 years found that when returns have been falling for six months and sit near the mean, they keep dropping over the next three months in about three-quarters of cases.
Valuations look cheaper, but buyers still have not shown up
On valuation, White said Treasuries still look attractive on an adjusted-yield basis after stripping out term premium, though that advantage has narrowed. At the same time, the gap between earnings yields and Treasury yields has compressed the equity risk premium to a more than 20-year low.
His fair-value model shows the 10-year yield is more than 60 basis points above where it would otherwise be, yet neither foreign investors nor domestic buyers have stepped in.
For equities, BNP Paribas CIB strategist Florian Roger said pressure on U.S. stocks would only truly begin once the 10-year yield reaches 5.5%. The market is already close to that level, and if it moves beyond it, stock valuations would start to look expensive.