The yield on the 10-year Treasury is trading near 4.20%, which was the RSM year-end target, and has averaged 4.18% for the year through Dec. 3.
And the yields are set to go higher. An economy with growth that could approach 3% with full employment, coupled with expectations of expansionary fiscal policy and a new tariff regime, all point toward higher rates.
This dynamic is best illustrated by the return of a positive term premium on Treasury issuance.
While the term premium is modest, given the changing policy matrix amid a strong economy, we expect yields in the new year to move to 4.5% with risk of a move to 5% or higher as the economy responds to lower taxes, increased spending and a stronger dollar.
We expect rates to fall along the short end of the Treasury curve between two years and five years over the next year, consistent with Federal Reserve intentions. But we expect them to rise along the long end between 10 and 30 years based on the strength of the economy and those policy changes.
The Federal Reserve will have to navigate a series of difficult fiscal and trade policy currents as it sets the federal funds policy rate.
Read more of RSM’s insights on the economy and the middle market.
We expect the Fed to cut the policy rate by 25 basis points in December to a range between 4.25% to 4.50% and then pause until the March meeting to ascertain if the real neutral rate is higher than that currently embedded inside the Fed forecast.
Our own estimate of the optimal policy rate at the Fed right now implies a 3.81% policy rate, so this implies that the Fed will reduce its policy rate by only another 100 basis points to a terminal rate of 3.75% sometime next year or in 2026.
