Morgan Stanley Predicts 25% Drop in 10-Year U.S. Treasury Yield by 2026

Morgan Stanley's rate strategists have forecasted a significant decline in the yields of G-10 government bonds by 2026. This prediction is based on the expectation that the yields will start to decrease in the fourth quarter of this year, with the 10-year U.S. Treasury yield reaching 4% by the end of the year and further dropping to 3% by the end of 2026. The firm anticipates that the Federal Reserve will cut interest rates by 175 basis points during this period. The strategists suggest that the government bond market may face turbulence due to tariffs, but inflation risks appear to be balanced. This balance is expected to encourage investors to buy government bonds rather than sell them.

In the United States, the more moderate fiscal deficits are expected to curb the supply of coupon-bearing bonds, and regulatory easing is likely to drive U.S. Treasuries to outperform SOFR and OIS swap contracts. The 10-year German government bond yield is projected to fall to 2.4% by the end of this year and to 2.25% by the end of 2026. The European Central Bank is expected to reduce its deposit rate to 1.5% this year, with inflation ultimately falling below its 2% target. In the United Kingdom, the 10-year government bond yield is forecasted to be 4.35% by the end of 2025 and 3.8% by the end of 2026. The Bank of England is anticipated to lower its interest rate to 2.75% by the end of 2026, as economic activity and inflation momentum slow down.

In Japan, the 10-year government bond yield is expected to decline, reaching 1.15% in the fourth quarter of 2025 and 0.90% in the second quarter of 2026. Traders no longer expect the Bank of Japan to raise interest rates during this period. Additionally, Morgan Stanley predicts that the yield curves of Canada and Australia will steepen as their central banks cut interest rates, while the yield curve of New Zealand will flatten after experiencing a significant steepening due to an aggressive rate-cutting cycle.