10-Year Yield Above 5% Trashes CBO Forecasts and Turns Debt Doves Into Hawks

The 10-year Treasury yield topped 5% this past week, its highest level since 2007 and far above the Congressional Budget Office's forecast track for borrowing costs over the next decade.

The CBO's most recent long-term outlook, issued in February before the Iran war spiked oil prices and inflation expectations, saw the benchmark yield at 4.1% this year and 4.2% in 2027. The office projected the 10-year yield would hover around 4.3% from 2028 to 2031, then tick up to 4.4% from 2032 to 2036. The market has blown through all of it.

Yields matter beyond the Treasury market. They set the pace on other borrowing costs, and they determine how much the Treasury Department must pay in interest on U.S. debt — a bill that accelerates as rates climb.

An end to the war in Iran and lower energy costs would help bring yields back down. But that is not the only source of upward pressure.

The economy is running hotter, and the labor market is tight, meaning higher yields partly represent normalization from crisis-era lows. Then there is the arithmetic of U.S. finances: $40 trillion in accumulated debt and $2 trillion in annual budget deficits that show no sign of improving.

Competition for capital adds another layer. Other heavily indebted countries and AI hyperscalers are competing for bond investors' money, so auctions require attractive yields to draw sufficient demand.

The geopolitical backdrop compounds the problem. Recent wars, trade friction, and disasters have produced shocks so frequent that markets no longer treat them as one-off events but as signs of a less stable world. That risk gets priced into yields too.

The bill for all of this is getting expensive fast. The Committee for a Responsible Federal Budget estimated that if yields remain more than 80 basis points over baseline projections, the U.S. will spend $2.7 trillion on annual interest payments by the end of the decade — more than Medicare or Social Security retirement benefits.

"The real threat is the debt spiral. If interest begets debt, and debt begets interest, eventually debt will spin out of control. A fiscal crisis, once unthinkable, is now a distinct possibility," Maya MacGuineas, president of the CFRB, said on Monday.

Budget watchdogs like the CFRB have sounded the alarm for years. What has changed is who is listening. The Treasury market's rapid deterioration is now alarming analysts and policymakers who previously downplayed the risks.

The 10-year yield has jumped a full percentage point since right before the Iran war started in late February, and half a point in the past two months alone.

Market veteran Ed Yardeni, who coined the term "bond vigilantes" to describe traders who protest huge deficits by selling bonds to push yields higher, had long maintained that yields of 4% to 5% are a normal range for a robust U.S. economy. As yields surged over the summer, he stayed unfazed, saying there was no sign the bond vigilantes were revolting.

That is changing. "We will worry about a debt crisis when the bond market worries about a debt crisis," Yardeni wrote in a note on Tuesday. "We are starting to worry now that the 10-year US Treasury bond yield may be on the verge of breaking out above 5.00%."

Jared Bernstein, who chaired the Council of Economic Advisers during the Biden administration, has shifted in the same direction. In a New York Times op-ed on Monday, he noted that he had not been an alarmist about the national debt for years and had even criticized those who called for more budget austerity.

But the math has changed, Bernstein wrote, pointing to rising interest rates, the massive deficit, and the lack of will from either party to tackle the problem.

"My point here is not to go through the relative merits of the different ways to stop digging," he wrote. "It's to say that even though I can't tell you the day and time when the fire will ignite, I can tell you that we're getting closer. And doing so at a rate that even this nonalarmist finds alarming."

With the yield now above the level the CBO does not expect until its forecast horizon ends — if ever — the question for markets is whether the normalization argument still holds or whether the bond vigilantes Yardeni long dismissed have finally arrived.