Key facts
- BNP Paribas forecasts 30-year Treasury yields will rise to 5.6%.
- Current 30-year Treasury yields are 5.43%, up from 4.83% at the start of the year.
- Higher long-term bond yields can negatively impact stock performance.
- BNP Paribas attributes rising yields to Fed rate hikes, government debt concerns, and increased borrowing demand.
- The bank estimates four Fed hikes could add $116 billion to the US government's annual interest expense in the first year.
- BNP Paribas expects fiscal spending to continue at high levels post-midterm elections, similar to the trend after 2018.
Rising long-term bond yields are expected to worsen, potentially pressuring stock markets further, according to BNP Paribas. The bank forecasts that yields on the 30-year Treasury bond could climb to 5.6% in the coming months, up from 5.43% as of Thursday afternoon and 4.83% at the start of the year. When bond yields rise, their values fall, making risk-free Treasury returns more competitive against long-term projected earnings yields from stocks.
BNP Paribas attributes the upward pressure on yields to several factors, including rising oil prices and associated inflation concerns, worries about increasing government debt, and strong borrowing demand from both the government and major technology companies. The bank's outlook for continued yield increases is primarily driven by fiscal risks.
First, the Federal Reserve's ongoing rate-hike cycle is expected to significantly increase the US government's interest payments on its borrowings. BNP Paribas estimates that if the market's expectation of four Fed hikes materializes, the Treasury's interest burden could rise by $116 billion in the first year and approximately $168 billion by the second year. This increase in interest expense could potentially offset all the incremental tariff revenues collected in 2025.
Second, the government's budget deficit is projected to widen again, influenced by tariff rollbacks and refunds, as well as the impact of rising long-term interest rates, creating a self-reinforcing cycle. Third, investors may be underestimating the government's appetite for fiscal spending following the US midterm elections. BNP Paribas suggests that even if a lower level of collaboration between the executive branch and Congress is anticipated, historical patterns, such as the period after the 2018 midterms, indicate that high spending levels can persist.
Additionally, defense spending is slated for an increase, with the bipartisan Senate Armed Services Committee having already approved a $250 billion rise in the defense budget. Given these fiscal risks, BNP Paribas believes that higher yields on the longer end of the yield curve are the most probable path forward.