U.S. long-term Treasury yields likely to climb later in 2026 as debt issuance complicates Fed balance-sheet plans

A Reuters survey of fixed-income strategists shows a growing consensus that long-term U.S. Treasury yields will firm later in 2026, even as rate-sensitive short-term yields drift lower on expectations of Federal Reserve easing. The poll’s median forecast puts the 10-year Treasury at 4.29% in one year, slightly above last month’s median, while the security currently trades near 4.16%, pointing to a near-term trading band but an asymmetric upside risk. Shorter-term views foresee the two-year yield easing to about 3.45% by end-April and roughly 3.38% by end-July as markets price cuts around a change in Fed leadership. A major source of upward pressure on longer maturities is projected Treasury supply: recent budget projections imply at least $4.7 trillion in additional deficits over ten years, and a majority of strategists in the poll judge that such issuance will make a meaningful Fed balance-sheet drawdown unrealistic. That interplay creates a policy tension — attempting to cut the policy rate while materially shrinking the Fed’s roughly $6.6 trillion balance sheet would push in opposite directions for long rates. Market participants expect the Fed’s operational response to lean toward slower, more predictable runoff of coupon holdings and a bias toward shorter-dated bill purchases rather than rapid sales of long-duration securities. Separately, portfolio managers at large houses are actively reworking allocations: reducing outright duration, taking short positions in long-dated government bonds, increasing inflation-protected securities exposure, and selectively tilting toward equities where nominal growth prospects appear more attractive. Inflation signals are mixed — official measures remain elevated in parts of the world even as some high-frequency alternative inflation indicators show lower readings — creating a bifurcated information set that leaves the pace of Fed easing contingent on persistence. Policy moves from Washington could also mute some household borrowing costs: the White House has directed Fannie Mae and Freddie Mac to expand purchases of mortgage-backed securities in a roughly $200 billion program designed to compress spreads in the secondary mortgage market. But mortgage pricing is tightly tied to the 10-year Treasury and broader supply/inflation dynamics, meaning any relief from GSE demand is likely to be partial and possibly temporary if long yields trend higher. International parallels — such as rising long-term yields in Australia approaching the 5% mark — underscore that persistent inflation and resilient growth can keep global long-term rates elevated. The survey and market commentary point to a rising term premium as issuance ramps up and Fed operational policy evolves, with implications for government borrowing costs, corporate financing, portfolio valuations and market liquidity. In the near term many strategists expect the 10-year to remain within a familiar range around 4.0–4.3% until clearer signals on inflation and supply emerge, but investors are advised to stress-test portfolios across scenarios given the asymmetric upside risk to long rates.