The benchmark 10-year Treasury yield climbed to 4.80% on Monday, reaching its highest level since October 2023 as investors demanded higher compensation for holding U.S. government debt.
The selloff intensified after the Congressional Budget Office released updated projections showing the federal deficit on track to exceed $2 trillion for fiscal year 2026.
Bond Vigilantes Return
"Bond vigilantes are back," noted Lisa Chen, head of fixed income strategy at BlackRock. "The market is sending a clear signal that the current fiscal trajectory is unsustainable."
The 2-year/10-year yield curve steepened to 45 basis points, the widest spread since early 2024, as longer-dated securities bore the brunt of selling pressure.
Deficit Projections Alarm Markets
The CBO's updated forecast projects:
- FY2026 deficit: $2.1 trillion (7.2% of GDP)
- Interest payments: $1.1 trillion annually
- Debt-to-GDP ratio: Expected to reach 120% by 2030
Net interest costs on federal debt are now projected to exceed defense spending for the first time in U.S. history.
Impact on Mortgage Rates
The rise in Treasury yields has pushed 30-year mortgage rates above 7.5%, further cooling an already sluggish housing market. Existing home sales fell 4.2% month-over-month in December, according to the National Association of Realtors.
Fixed Income Strategy
In this environment, fixed income strategists recommend:
- Shortening duration to reduce interest rate sensitivity
- Considering Treasury Inflation-Protected Securities (TIPS)
- Evaluating investment-grade corporate bonds for yield enhancement
- Maintaining cash buffers in high-yield money market funds
The Treasury Department is scheduled to auction $42 billion in 10-year notes on Thursday, which will test investor appetite for duration risk.