- T. Rowe Price expects the U.S. 10-year Treasury yield to rise toward ~5% in early 2025 with upside risk to ~6% amid deficits, supply, and inflation uncertainty.
- They are positioned short duration and favor floating-rate loans as a relatively direct beneficiary of higher yields due to negative duration and reasonable valuations.
- Long-duration Treasuries are viewed as expensive and likely to underperform if yields rise, though they can still serve as a hedge if growth weakens or yields overshoot.
- Equities may outperform bonds when yields rise—especially value/cyclicals—but the stock-bond link is unstable and can flip in inflation shocks or high-valuation regimes.
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The primary article from T. Rowe Price (“How will a rising 10-year Treasury yield impact other assets?”, published March 2025) outlines their view that the U.S. 10-year Treasury yield is likely to increase. They position for this by being short duration across credit markets, and emphasize that floating rate loans are particularly well-positioned due to their negative empirical duration and favorable valuation versus the U.S. Aggregate bond index.
Supporting this, T. Rowe Price’s fixed income CIO Arif Husain, in other reports, warns that U.S. fiscal expansion under the Trump administration—tax cuts, tariffs, high deficits—along with inflationary pressures, could push the 10-year yield first to ≈5% by Q1 2025, and potentially up to 6% over time. The current yield at the time of these forecasts was in the low‐4% range (≈4.4%).
The analysis of duration estimates in the primary source breaks down how different asset class pairs respond to changes in the 10-year yield: the long-duration bond sectors underperform as yields rise; growth stocks should theoretically underperform value stocks, though this has been disrupted by momentum in AI and growth themes. Value stocks, financials, materials tend to benefit in rising yield environments given their cash flows and sensitivity to inflation.
Strategically, this implies investors should consider shifting weight away from long duration fixed income assets toward floating rate instruments, perhaps reduce exposure to assets that have stretched valuations (growth stocks), and instead lean into sectors which historically perform better when rates increase. Equally, long duration bonds retain utility as hedges—if yields overshoot or growth weakens sharply. Moreover, bond supply (from deficits) and weak global demand for U.S. Treasuries intensify upward pressure on yields.
However, the relationship between rates and other asset classes is unstable. In particular, equities may outperform bonds even when yields rise—if the yield increases stem from growth expectations rather than inflation—and high valuation levels could reverse expected relationships. Thus, risk of inflation shocks, or tightening beyond expectations, remains significant.
Open questions include: What path will inflation take through 2025? Will fiscal policy remain expansive with meaningful debt issuance? How will global demand for U.S. Treasury bonds behave? How might the Federal Reserve respond if growth slows while inflation remains sticky?
Supporting Notes
- T. Rowe Price’s Asset Allocation Committee is positioned for U.S. 10-year Treasury yield to rise, taking a short duration stance across bond markets. Key drivers cited include inflationary uncertainty, a flat yield curve, pro-growth policies, and large deficits.
- Floating rate loans exhibit a strongly negative empirical duration relative to the U.S. Aggregate bond index, and trade at a median valuation, making them efficient tools to benefit from rising yields.
- Long-duration Treasury bonds significantly underperform core investment grade bonds when 10-year yields increase; specifically, the Treasury Long vs. U.S. Aggregate duration is about +8.
- T. Rowe Price projects yields will test ~5% in the first quarter of 2025, with risk of 6% if inflation persists and fiscal deficits worsen under Trump’s policy agenda.
- The last time the 10-year U.S. Treasury yield reached 6% was back in 2000.
- Equity vs bond pair currently has empirical duration ≈-1.5 (negative) but historically has ranged down to -15, showing stocks may outperform bonds when yields rise—but not always, especially in inflationary shocks or when valuation is high.