Why 30-Year Treasury Yields Have Further Room to Rise in 2026

The Federal Reserve's December 2025 policy statements revealed a central bank grappling with divergent signals between inflationary pressures and labor market concerns. While the FOMC delivered a 25-basis-point rate cut to address weakening employment data, persistent inflation risks and structural economic headwinds suggest that 30-year Treasury yields may still face upward pressure in 2026. This analysis explores how the Fed's mixed messaging, combined with unresolved inflationary forces, could create a fertile environment for higher long-term yields.

Persistent Inflation Risks: Tariffs and Service-Sector Pressures

Despite the Fed's rate cuts, inflation remains stubbornly elevated. The New York Fed's DSGE model forecasts highlight that cost-push shocks-particularly from tariffs and elevated service-sector prices-have pushed 2025 inflation projections to 2.9%, with a gradual decline to 2.4% in 2026. These figures, while below the peak of 2024, still exceed the 2% target by a significant margin. Tariff-driven supply chain disruptions and sticky service-sector inflation (e.g., healthcare, housing, and labor costs) are structural challenges that could delay the Fed's return to price stability. According to the New York Fed's DSGE model, inflation risks remain elevated.

Moreover, the December 2025 Summary of Economic Projections (SEP) acknowledges that inflation is "well above" the 2% target, with risks skewed to the upside. This divergence between policy actions and inflation realities creates uncertainty for investors. Historically, when central banks struggle to anchor inflation expectations, long-term Treasury yields tend to rise as investors demand higher compensation for inflation risk.

Divergent Policy Signals: Dovish Cuts vs. Hawkish Guardrails

The Fed's December 2025 decision to cut rates by 25 basis points reflected a dovish tilt toward supporting employment, with Philadelphia Fed President Anna Paulson emphasizing "growing concerns for the labor market." According to market analysis, unemployment fears have outweighed inflation concerns. However, this move was not unanimous: Three officials dissented, with Governor Stephen Miran advocating for a larger 50-basis-point cut and others resisting any reduction. Market expectations suggest a 58% probability of at least two cuts by October 2026. This gap between the Fed's cautious stance and market optimism could narrow if inflation proves more persistent than anticipated. A reversal in policy-or even a delay in rate cuts-could trigger a repricing of inflation risk, pushing Treasury yields higher.

Structural Factors Supporting Higher Yields in 2026

1. Balance Sheet Normalization: The Fed's resumption of Treasury purchases in December 2025 aimed to stabilize liquidity in overnight funding markets. However, prolonged asset purchases risk inflationary pressures in the broader economy, which could force the Fed to tighten policy sooner than expected.
2. Inflation Expectations: The 30-year Treasury yield incorporates long-term inflation expectations. With the Fed's credibility on price stability still in question, investors may demand a higher risk premium, even if short-term rates trend downward. According to market analysis, inflation expectations remain elevated.
3. Global Capital Flows: A weaker U.S. Dollar Index following the December rate cut could attract foreign capital into higher-yielding assets, including Treasuries. However, this dynamic may reverse if the Fed signals a hawkish pivot, leading to outflows from non-yielding assets like gold and a shift back to Treasuries as a safe haven. According to market analysis, investors are monitoring policy signals closely.

### Conclusion: A Tenuous Equilibrium
The Fed's December 2025 policy actions reflect a central bank navigating a complex landscape of divergent signals. While rate cuts have initially supported Treasury yields, the persistence of inflationary forces-tariffs, service-sector costs, and structural bottlenecks-suggests that long-term yields may not remain anchored. A potential hawkish pivot, driven by upward revisions to inflation or a stronger-than-expected labor market, could reignite upward pressure on 30-year yields. Investors should remain vigilant, as the Fed's dual mandate and leadership transition (with Jerome Powell's term nearing its end) add further uncertainty to the policy path.