Treasury yields are 'really, really high,' but can come down soon, Bessent's new adviser says

Treasury counselor David Zervos said U.S. real yields, with 10-year and 30-year yields recently reaching 24-year highs, have room to decline, describing the pressure as temporary. He cited corporate AI investment and an energy shock linked to the U.S.-Iran war; Brent crude rose about 38% from the conflict’s start through Wednesday. Fed funds futures implied more than an 82% chance of a December rate increase, while higher borrowing costs have weighed on mortgage demand.

Analysis

Zervos’s forecast is not a policy signal: Treasury commentary cannot offset the market’s inflation, issuance and term-premium pricing. The key distinction is nominal versus real yields. If energy prices retreat, inflation compensation may ease, but persistent real-rate pressure from borrowing needs and AI-related investment could keep long yields elevated. That would limit the relief to mortgage rates and long-duration equities even if the Fed’s expected path softens.

The cross-market move argues against treating this as a uniquely U.S. dislocation. Global duration supply and energy exposure matter; a U.S.-only long-duration bet risks being overwhelmed by common drivers. Housing is the clearest near-term casualty of sustained high real rates, while AI infrastructure beneficiaries face a two-sided effect: demand support, but higher financing costs and a potentially higher hurdle rate for investment.

Over days, official reassurance may prompt a positioning-led rally, but it is fragile. Over 1–3 months, watch Brent, inflation compensation, Treasury auction demand and Fed repricing. Over 6–18 months, continued AI capex and sovereign borrowing could sustain a higher term premium. The contrarian risk is assuming an energy unwind guarantees a broad duration rally; it may lower breakevens without materially lowering real yields.

Key Decisions for Investors

• Do not chase long-duration Treasuries solely on the official commentary. Treat a decline in Brent alongside easing inflation compensation—not rhetoric alone—as a confirmation trigger for adding intermediate-duration exposure; cut the position if energy inflation re-accelerates or real yields make fresh highs.
• Watch for a 5s30s Treasury flattener (long 5-year exposure, short 30-year exposure) only if oil and near-term inflation expectations turn lower while long-end auction demand remains weak. The thesis is that policy repricing helps the belly while supply and term premium cap the long-bond rally. Falsifier: strong long-end auctions and a sustained decline in long real yields.
• Keep housing-sensitive exposure, including homebuilders, on an interest-rate watchlist rather than initiating a rate-relief trade now. Confirmation would be sustained mortgage-rate easing; renewed yield highs would invalidate the recovery setup.