NEW YORK — U.S. Treasury yields at the long end of the curve remain stubbornly elevated, even as softer Personal Consumption Expenditures data and less hawkish Federal Reserve rhetoric have eased pressure on the front end.
Treasuries are beginning to screen as cheap across several valuation metrics. Against nominal gross domestic product, global yields and macro fair-value models, the 10-year Treasury is offering a rich yield. The equity risk premium has compressed so deeply that Treasury yields now challenge expensive equity valuations on a relative basis.
Yet the puzzle persists: if Treasuries are cheap, why aren't buyers stepping in?
The answer lies in historical context. Bloomberg's Simon White's framework indicates that current Treasury valuations have not yet reached the overshoot levels that typically mark a lasting market reversal. Cheap valuations alone do not equate to an oversold condition.
Real yields represent the primary pressure point. The majority of recent yield increases have stemmed from real yields rather than breakeven inflation rates. White's leading indicators suggest this upward pressure on real yields has the potential to persist, delaying a durable turn for Treasuries.
The fiscal and liquidity environment adds another layer of complexity. Elevated yields can contribute to increased market volatility, reduced liquidity and tighter risk limits for institutions. The persistent U.S. fiscal deficit continues to support a stubborn term premium—the additional compensation investors demand for holding longer-dated bonds due to inflation and interest rate risk.
The result is a bifurcated market: the valuation case for Treasuries is becoming compelling, but timing remains uncertain.
