Where will the 10-year U.S. Treasury yield go? State Street Investigates Bessant's Focus on Financial Metrics
The most heated discussion at State Street's investment arm, which manages $6 trillion in assets, is the outlook for the yield on the 10-year U.S. Treasury note, a financial indicator that Treasury Secretary Scott Bessent values. "I'll be honest with you, I'm confused sometimes," said Chief Investment Officer of State Street "This is the issue we debate the most internally," he said in an interview last week. When entering 2026, State Street expected yields to fall to 3.5% or even lower during the year, but instead they continued to rise. Yields topped 4.7% last week for the first time since the month Trump began his second term. The gains underscore how Iran's war has upended economic expectations by pushing up oil prices and stoking inflation fears. The company's resilience in the face of hostilities is partly due to a boom in artificial intelligence, which has helped the Boston-based financial giant shift its mindset. The U.S. economy’s resilience in the face of conflict — fueled in part by the boom in artificial intelligence, of course — prompted the Boston-based financial giant to change its thinking. “What shocked me most was how little impact it had domestically,” Heinel said of the war. She said that while there is "still some upside risk" to the 10-year bond yield, current levels represent good value. "Our recent tactical allocation has shifted to investing in long-term and credit." Heinel said State Street gave up its forecast about a month and a half ago that the Fed would cut interest rates this year. She accurately predicted in 2024 that the U.S. central bank would start an easing cycle with a sharp cut of 50 basis points. She now believes the Fed will remain on hold throughout the year rather than lower its benchmark interest rate. At the same time, the bond market has fully priced in expectations of the Federal Reserve raising interest rates in September, and believes that the probability of raising interest rates at this week's meeting is about 35%. "But we still think the next step is a rate cut, not a rate hike," Heinel said. When Bessant took office last year, he identified the 10-year bond yield as a financial indicator he focused on because of its broad economic impact as a benchmark for loans such as mortgages and corporate loans.