In recent months, the U.S. economic outlook has taken a sharp downward turn. Since March, expectations for U.S. economic growth over the next two years have been revised lower at the fastest rate in the past three years. Despite this grim outlook, the real yield on the U.S. 10-year Treasury note has moved sharply higher—up about 40 basis points to 2.2%.
Under normal circumstances, stronger growth forecasts tend to push bond yields higher, as investors anticipate rate hikes from the Federal Reserve. However, this time, the script has flipped. Yields are rising even as forward-looking GDP projections collapse—an unusual and potentially alarming shift.
What’s Behind the Divergence?
The recent drop in growth forecasts is based on rolling revisions to consensus estimates for U.S. GDP over the next two years. These revisions reflect weekly updates from Bloomberg, weighted by the number of months remaining in each forecasted year. The decline has been steep and rapid, suggesting growing doubts about the strength of the U.S. economy heading into late 2025.
In contrast, real yields—those adjusted for inflation—have continued to climb. By May 2025, they’ve broken away from their historical alignment with growth expectations, suggesting something else is driving investor sentiment. The most likely culprit? Mounting concerns over U.S. fiscal health.
With rising deficits, ballooning national debt, and political gridlock around budget and tax policy, investors may be demanding higher returns to compensate for the long-term risk of holding U.S. government debt. This risk premium is now showing up in real yields, even as the economic engine shows signs of slowing.
Key Date to Watch: May 29
Adding further weight to these concerns, the U.S. is set to report its official GDP growth data on May 29. This release could either confirm the market’s pessimism or offer a brief reprieve. Regardless, it will be a critical moment for both bond investors and those watching for signs of economic inflection.
What Lies Ahead
If this dislocation between growth expectations and real yields continues, it could spell trouble. Higher yields amid slowing growth tighten financial conditions and could even accelerate a downturn. Analysts warn that the 10-year nominal yield could approach 5.00% if concerns about the fiscal situation persist.
In summary, the bond market is sending a strong and unusual signal. Investors would be wise to pay attention—not just to what the Fed says, but to what the market is quietly pricing in.
Disclaimer:
The information provided in this article is for educational and informational purposes only and does not constitute financial, investment, or trading advice. Always conduct your own research and consult with a licensed financial advisor before making any investment decisions.
