Key Takeaways:
Policy interventions aimed at fixing the housing crisis for the under-40 demographic risk triggering structural inflation that could push US Treasury yields to 10%, a hedge fund manager has warned.
The 10-year US Treasury yield rose four basis points to 4.71% on Thursday, its highest level since January 2025, extending a selloff that began after the Iran conflict pushed Brent crude above $100 a barrel. The yield had dipped below 4% before the war started in late February. Markets now price a 36% probability the Federal Reserve raises rates at its next policy meeting, according to CME FedWatch data.
"Addressing the housing affordability gap through broad-based policy intervention without addressing the supply-side constraints will embed structural inflation into the economy," said the hedge fund manager, who requested anonymity discussing proprietary views. "That forces the 10-year toward 10% over the cycle as the term premium reprices."
The warning comes as the bond market already faces multiple pressures. The 30-year yield hit its highest level since 2007 in May, while the average 30-year fixed mortgage rate climbed to 6.58%, the highest in almost a year. JPMorgan Chase Chief Executive Officer Jamie Dimon said this week he would not purchase long-dated Treasuries at current prices, citing concerns about inflation and government deficits. The war with Iran has cost the US $37.5 billion so far, Defense Secretary Pete Hegseth said Tuesday, adding to fiscal pressure.
A 10% 10-year yield would represent a seismic repricing across asset classes. The S&P 500 has already fallen about 2.5% since its early June record high, while the Nasdaq Composite has dropped more than 7% from its peak. Alphabet Inc. fell almost 7% and Tesla Inc. sank 14.5% this week after earnings disappointed. The Dow Jones Industrial Average lost 507 points, or nearly 1%, on Thursday alone. The last time the 10-year yield approached double digits was in the early 1980s, when then-Fed Chair Paul Volcker raised the federal funds rate above 20% to break the back of double-digit inflation.
The forecast also arrives as the Fed transitions to new leadership. Kevin Warsh took over as chair in May after eight years under Jerome Powell, pledging reforms to the central bank's communications, inflation frameworks, and balance sheet policy. Traders are parsing Warsh's early signals for clues on how aggressively the Fed might respond if inflation expectations become unanchored.
For the housing market, the implications are stark. A 10% 10-year yield would push mortgage rates well above 8%, deepening the affordability crisis the policy interventions were designed to solve. The under-40 demographic, already priced out of homeownership in many markets, would face even higher barriers. If the Fed is forced to hike into a slowing economy to contain housing-driven inflation, the risk of a policy error — and a hard landing — rises materially.
This article is for informational purposes only and does not constitute investment advice.
