But inflation expectations aren’t the reason why
It seems investors remember they like Treasury bonds. Last week, they drove 10-year Treasury bond prices higher, pushing the 10-year yield down 17 basis points (the biggest weekly yield decline so far this year) and offering welcome relief to investors worried that higher yields could start to restrict growth. The move lower reversed the rising-yield environment that brought the 10-year yield to around 5.3%, a level investors clearly found attractive last week, and that could signal a sustainable ceiling for longer-term rates.
This shift into “safe haven” U.S.-government-backed bonds came amid rising concerns about AI-backed corporate bonds. Specifically, that some AI companies might struggle to service the large amounts of debt they’ve taken on to fund growth.
One factor that didn’t play a big role last week was inflation expectations, as yields fell despite hotter-than-expected inflation data. As we’ve noted recently, higher Treasury yields this year largely reflect stronger economic growth rather than fears of untamed inflation. In fact, long-term inflation expectations (shown in yellow in the chart below) have remained remarkably stable this year despite the sharp rise in the 10-year’s nominal yield.
U.S. 10-Year Yield and Its Components
Bloomberg, calculations by Horizon, data as of 10/19/2026
Overall, that makes today’s higher yields a healthy sign—one that points to a return to more historically normal real-yield levels instead of an impending inflation crisis. In that environment, bonds could diversify portfolios better than they have recently.
Of course, the bond market’s health depends on continued stability. If inflation expectations rise sharply above their narrow range, interest rates could spike to levels that cause stocks and bonds to sell off simultaneously. This risk is timely, since what looks like a durable ceiling on yields hinges on inflation expectations staying well anchored.
For inflation expectations to hold, investors must remain confident that the Federal Reserve Board is taking the steps necessary to tame inflation. Next week’s Fed policy meeting and Fed Chair Walsh’s post-meeting comments will be the latest opportunities for investors to assess the Fed’s efforts.