Treasury Investors Should Demand Higher Yields
The 10-YR Treasury yield - Fed Funds spread ought to widen.
The Fed is about to throw gasoline on the burning Dollar as it prepares to lower Fed Funds at a time when the U.S. is running a fiscal deficit that will be between 6-7% of 2025 GDP (fiscal deficit is $1.97 Trillion as of month-end August 2025). If the Treasury market has any discipline, the spread between the 10-YR and Fed Funds Rate ought to widen as Fed Funds comes down.
While the 10-YR yield may dip further in the near-term (albeit at a slower rate than Fed Funds), it is not unrealistic to believe that the 10-YR yield may ultimately march higher. Treasury investors may increasingly wise up to the fact that the United States’ fiscal path is unsustainable. The Dollar is depreciating quickly versus gold and versus the price of goods and services. Treasury investors ought to be compensated for this risk/reality in the form of higher yields, particularly in the out years.
