Bond market strategists increasingly believe elevated long-term yields may persist even if geopolitical tensions in the Middle East ease and oil prices retreat, signaling a potentially more challenging environment for fixed-income investors and portfolio construction.
While recent market attention has centered on inflation risks tied to the Iran conflict and disruptions in global energy markets, several Wall Street firms argue that deeper structural forces are now driving borrowing costs higher — particularly in the US Treasury market.
Strategists at Barclays, Goldman Sachs, ING, and Bank of America point to rising real yields, expanding fiscal deficits, growing Treasury issuance, and the long-term economic implications of the artificial intelligence investment boom as key factors behind the recent rise in long-duration rates.
For wealth advisors and RIAs, the takeaway is increasingly clear: even if oil prices stabilize and inflation pressures moderate, bond yields may remain structurally higher than investors became accustomed to during the post-financial crisis era.
“The argument that duration is selling off globally due to inflation fears is hard to square with market pricing of medium- and long-term inflation risk,” said Jonathan Hill, head of US inflation strategy at Barclays. “Instead, the interaction between rising debt levels, potentially higher neutral rates, and AI could be driving real rates higher.”
That distinction matters for advisors evaluating fixed-income positioning.
Market-based inflation expectations, measured through Treasury break-even rates, have not risen nearly as sharply as nominal yields in either the US or UK. In fact, Barclays notes that key medium-term inflation indicators remain well below levels seen during the Fed’s aggressive tightening cycle in 2022.
The 10-year US breakeven inflation rate remains roughly 50 basis points below first-half 2022 levels, while the closely watched five-year, five-year forward inflation measure is holding near 2.2% — roughly unchanged from December.
Instead, much of the recent move higher in Treasury yields has been driven by rising real yields, which strip out inflation expectations and are often viewed as a cleaner gauge of underlying borrowing costs and economic growth expectations.
According to Bloomberg analysis, rising real yields now account for the majority of the increase in US Treasury rates.
That dynamic suggests bond investors are increasingly concerned about broader structural issues rather than simply short-term inflation tied to energy prices.
Among the biggest concerns: persistent fiscal deficits, expanding federal debt burdens, and the prospect of significantly higher Treasury issuance in the years ahead.
President Trump’s renewed push for tax cuts, combined with elevated government spending and rising debt-servicing costs, has intensified investor focus on long-term fiscal sustainability. Strategists warn that larger deficits may require materially more Treasury issuance at a time when demand for long-duration debt is becoming more price sensitive.
“In an environment where larger fiscal deficits become a driver of rising debt servicing costs, the long end of the curve becomes more sensitive,” Bank of America economists Claudio Irigoyen and Antonio Gabriel wrote in a recent note.
For RIAs, that backdrop complicates the traditional diversification role of long-duration bonds.
Historically, Treasuries have offered portfolio protection during periods of economic uncertainty or geopolitical stress. But if yields remain elevated because of structural debt concerns and rising real rates, fixed income may behave differently than it did during the low-rate era of the 2010s.
Strategists at ING argue that even if the Strait of Hormuz fully reopens and oil-related inflation fears subside, long-term Treasury yields could remain “stranded” at elevated levels because real yields are unlikely to fall significantly.
Padhraic Garvey, ING’s regional head of research for the Americas, estimates that essentially the entire move in 10-year Treasury yields above 4.5% has been driven by higher real yields rather than inflation expectations.
“A reopening of the Strait would cap inflation expectations, but could leave real yields elevated,” Garvey said. “If so, Treasury yields don’t collapse lower as many currently anticipate.”
That view aligns with a growing consensus among institutional investors that the bond market is repricing a more durable shift in the macroeconomic regime.
“The bond market is not reacting to one headline,” Mark Malek, chief investment officer at Muriel Siebert & Co., wrote in a note to clients. “It is repricing a structural problem that cannot be solved with a press release or diplomatic pause.”
Another emerging factor is the AI investment cycle itself.
While artificial intelligence could ultimately improve productivity and support disinflation over the long term, strategists note that the near-term impact may actually be inflationary. Massive spending on semiconductors, data centers, energy infrastructure, and digital capacity is fueling demand across multiple sectors while increasing corporate borrowing needs.
At the same time, stronger growth expectations tied to AI may encourage investors to continue favoring equities over bonds, forcing fixed-income markets to offer higher yields to remain competitive.
Goldman Sachs’ Phillip Lee said persistent fiscal deficits, rising Treasury issuance, and mounting concerns over debt sustainability are increasingly driving investors to demand greater compensation for holding long-term debt.
“I think rates are going higher,” Lee said during a recent Goldman podcast.
Even expectations around Federal Reserve policy have shifted materially. Markets entered the year anticipating multiple Fed rate cuts, but traders are now increasingly pricing in the possibility of additional hikes if inflation remains sticky and growth stays resilient.
Some strategists also believe the so-called neutral rate — the level of interest rates that neither stimulates nor slows the economy — may have moved structurally higher.
If that proves correct, today’s elevated Treasury yields may represent a new normal rather than a temporary spike.
Bloomberg Economics summarized the broader shift succinctly: for decades, rising global savings and weaker investment demand pushed borrowing costs steadily lower. Now, that trend appears to be reversing as governments, corporations, and industries invest aggressively in infrastructure, technology, energy, and AI.
For advisors, the implication is significant: portfolios may need to adapt to a higher-rate environment that persists well beyond the current geopolitical cycle.
