CBO forecasts 10-year US Treasury yields at 4.1% in 2025, 3.9% average for 2024-2034

CBO forecasts 10-year US Treasury yields at 4.1% in 2025, 3.9% average for 2024-2034

Introduction:

The Congressional Budget Office (CBO) recently released its latest economic forecast, projecting that 10-year US Treasury yields will reach 4.1% in 2025, with an average of 3.9% from 2024 to 2034 [1]. These projections, which reflect the Federal Reserve's expected response to inflation and the resulting impact on interest rates, offer valuable insights into the future of the US economy.

Economic Output and Inflation:

According to the CBO, economic output, or gross domestic product (GDP), is projected to stop growing early in 2023 due to last year's sharp rise in interest rates [1]. However, output is expected to resume growth during the second half of the year as falling inflation allows the Federal Reserve to reduce interest rates. Inflation, which was higher in 2021 and 2022 than in any other years of the previous four decades [1], is projected to remain above the Federal Reserve's long-term goal of 2% through 2024 and then fall near to that goal by 2026.

Interest Rates and Unemployment:

Interest rates on Treasury securities are expected to rise further in early 2023 and then gradually fall beginning in late 2023 [1]. The unemployment rate, which was 3.6% at the end of 2022, is projected to increase to 5.1% at the end of 2023 before gradually declining to 4.5% by the end of 2027.

Impact on the Federal Budget:

The CBO's projections for the federal budget depend in part on its projection of the growth of nominal GDP [1]. Since May 2022, the agency has lowered its projection of the growth of nominal GDP in 2023 from 4.5% to 3.1% but is now projecting much faster growth in the 2024–2026 period. The CBO has also increased its projections of short- and long-term interest rates over the next five years, mostly due to higher near-term inflation projections.

Conclusion:

The CBO's latest economic forecast offers valuable insights into the future of the US economy, including projected 10-year US Treasury yields, economic output, inflation, interest rates, and unemployment. These projections reflect the Federal Reserve's expected response to inflation and its impact on interest rates, providing valuable guidance for investors, policymakers, and analysts.

References:

[1] Congressional Budget Office. (2023, February). The Budget and Economic Outlook: 2023 to 2033. Retrieved February 28, 2023, from https://www.cbo.gov/publication/58957