Analysis: Lower Treasury yields could require a weaker economy. Trump won't fix them

• The 10-year Treasury yield has risen roughly 0.75 percentage points over six months to near 4.8%, pushing mortgage rates to nearly 6.8% and increasing consumer borrowing costs
• Major tech firms have issued approximately $320 billion in debt this year to fund AI infrastructure, creating supply-demand pressures on long-term yields and competing with government borrowing
• The Congressional Budget Office revised the fiscal year deficit projection to exceed 6% of GDP, while global investors like Norway's sovereign wealth fund and Allianz are reducing Treasury holdings due to unfavorable economics after hedging and inflation

Summary

Key Developments:

Long-term Treasury yields remain elevated near 4.8% on the 10-year note, up approximately 0.75 percentage points over six months, marking highs for President Trump's second term. The administration's efforts to lower yields have proven ineffective, with lower rates likely requiring economic weakness that would undermine growth.

Major Factors Driving Yields Higher:

• Growing deficits: Congressional Budget Office revised fiscal year deficit projections to over 6% of GDP
• Shifting investor base: Global investors demanding higher compensation due to concerns over Fed independence, deficit spending, and Treasury market intervention
• AI infrastructure competition: Five major tech companies (Amazon, Google, Meta, Microsoft, Nvidia) have issued approximately $320 billion in debt this year to fund chips and data centers, creating supply-demand pressure at the long end of the yield curve
• Hedging costs: International investors like European insurer Allianz report U.S. investments no longer profitable after accounting for inflation and hedging costs

Market Implications:

Mortgage rates have risen to nearly 6.8%, tracking the 10-year Treasury. Real yields (10-year TIPS) increased 67 basis points to 2.43% over six months, while inflation expectations remained flat. Norway's sovereign wealth fund plans to shift holdings from government debt to higher-yielding securities like mortgage-backed securities.

Economic Context:

Q2 GDP growth slowed to 1.5%, partly due to immigration restrictions. NY Fed President Williams suggests elevated yields reflect economic strength rather than constraint, implying yields may only decline with economic weakening—an undesirable outcome for policymakers and markets alike.