Matt’s Top Trade to Watch in 2026: US Treasury Yields

US Treasury Yields Key Points

• 2026 brings a risk that premature interest rate cuts from a more dovish Federal Reserve could lead to a rise in longer-term Treasury yields (and mortgage rates).
• This phenomenon is called a “bear steepening” of the yield curve, where short-term interest rates remain low or fall but longer-term interest rates nonetheless rise.
• A bullish breakout above ~4.6% in 10yr Treasury yields could target at least 18-year highs in yields just above 5.00%, with potential for a more substantial move if market confidence is truly shaken.

2026 is setting up to be a fascinating year, and my colleagues will be covering their own “Trades to Watch” in the coming year over the next few days.

For my part, I’ll be watching the benchmark 10-year US Treasury yield as at least a key economic indicator and potential trade setup in 2026. The US Treasury market is one of the deepest and most liquid markets on the planet, and it serves as a key indicator of the so-called “risk-free” rate that serves as the basis for all other investments.

Everyone knows that the US Federal Reserve has been cutting interest rates on and off since late 2024, and more easing is expected in the coming year. What some traders don’t realize though is that the Fed’s target Fed Funds rate is specifically related the short-term cost of borrowing, which is why many analysts look at the chart of 2-year yields as a proxy for what the Federal Reserve will do.

Longer-term interest rates, such as the 10- and 30-year Treasury rate is determined more by underlying economic conditions – specifically growth and inflation – than near-term expectations over those periods.

With real-estate-investor-turned-President Donald Trump set to nominate a dove to take over as Chairman of the Federal Reserve in Q2, most are (reasonably) anticipating 2-3 more interest rate cuts by the end of 2026. Indeed, Trump himself made the following proclamation in mid-December: “I will soon announce our next chairman of the Federal Reserve, someone who believes in lower interest rates by a lot, and mortgage payments will be coming down even further.”

I have few doubts about the first half of the quote, but there’s a (substantial in my view) risk that continued interest rate cuts could actually lead to a rise in longer-term yields and mortgage rates if the market deems them premature. If the Fed makes a policy error by cutting interest rates below the “neutral” level with inflation remaining above its target, it could paradoxically lead to higher long-term interest rates, as traders price in the risk of more substantial inflation down the road.

In bond trader parlance, this phenomenon is called a “bear steepening” of the yield curve, where short-term interest rates remain low or fall but longer-term interest rates nonetheless rise. Because the 10-year Treasury yield is used as the risk-free rate that all other investments are measured against, such a development may be seen as bearish for major US indices (especially housing-related stocks as mortgage rates rise) and, potentially, the US dollar.

There’s admittedly plenty of projection in the above analysis, but at a minimum, readers should be wary of the risk that a dovish shift at the Federal Reserve could lead to a “surprise” increase in longer-term interest rates in 2026.

US Treasury Yield Technical Analysis: TNX Daily Chart

Source: StoneX, TradingView

Looking at the chart of 10-year US Treasury yields, interest rates have put in a series of higher lows and lower highs over the last 2.5 years, creating a textbook symmetrical triangle pattern. This pattern would be confirmed by a breakout beyond the trend line connecting the highs or lows, signaling a likely continuation in the same direction of the breakout.

If the above scenario plays out, a bullish breakout above the upper trend line (currently around 4.6%) would open the door for a move up to at least 18-year highs in yields just above 5.00%, with potential for a more substantial move if market confidence is truly shaken.

-- Written by Matt Weller, Global Head of Research

Check out Matt’s Daily Market Update videos on YouTube and be sure to follow Matt on Twitter: @MWellerFX