Three model estimates point to expectations for future short-term rates as the main factor behind much of the 2026 rise in U.S. 10-year Treasury yields, while inflation compensation has edged up only slightly, housing economist Tom Lawler said.
CalculatedRisk author Bill McBride published Lawler’s analysis in an Oct. 21 post. It compares estimates of the term premium on 10-year zero-coupon Treasury securities from the ACM, KW and CR models, using readings from Dec. 31, 2025, and Oct. 16, 2026. The term premium cannot be observed directly, so the figures come from models.
The estimates differ on how much of the yield increase came from the term premium. In the ACM and CR models, higher expected average short-term rates over the coming decade account for nearly all of the rise. The KW model assigns slightly less than half of the increase to a higher term premium. Lawler cited a Federal Reserve Bank of New York description of the premium as compensation investors require for the risk of rate changes while holding longer-term debt.
Breakeven CPI inflation rates implied by Treasury and Treasury Inflation-Protected Securities (TIPS) markets were only slightly higher on Oct. 16 than on Dec. 31, 2025, Lawler said. He said the readings pointed to higher expected real interest rates and a higher market estimate of the intermediate-term neutral real rate than the median forecast in the latest Federal Open Market Committee Summary of Economic Projections.
Lawler also noted that expectations for future real rates began rising around the time actual and projected borrowing needs tied to the artificial intelligence buildup started to surge. His post describes the timing, without establishing that the borrowing needs caused the change in rate expectations.
In the mortgage market, the current-coupon mortgage-backed securities yield stood at 6.27% after moving down from a new yearly high on Oct. 5. Lawler said it remained above levels from the first eight months of 2026. He described CMBS/Treasury spreads as elevated for the year but modest against historical ranges after periods of Federal Reserve activity in the MBS market are excluded. He also linked wider spreads with greater implied interest-rate volatility.
EconoTimes previously examined how wider MBS spreads may affect AGNC Investment Corp.’s book value.
