Long-end Treasury yields may remain elevated, with strategy focused on curve steepening, cautious duration and an overweight in emerging-market foreign exchange

Overview

Beginning with U.S. rates, the report successively evaluates global developed-market rates, foreign exchange, commodities and emerging markets. Its central view is that U.S. inflation and term-premium risks will keep medium- and long-term Treasury yields elevated, while European duration still warrants caution. Meanwhile, Treasury buybacks are insufficient on their own to establish a lasting weak-dollar thesis, whereas emerging-market foreign exchange continues to receive support from the cyclical outlook.

Core views

U.S. macroeconomics and monetary policy form the report's primary analytical thread. J.P. Morgan expects U.S. GDP to grow 2.0% on a fourth-quarter-over-fourth-quarter basis in 2026, core PCE inflation to remain at 3.5%, and the unemployment rate to be 4.1% in the fourth quarter of 2026. With inflation still elevated and the Federal Reserve's credibility impaired, the report expects the committee to raise rates by 25 basis points in December 2026, lifting the federal funds target range from 3.50%-3.75% to 3.75%-4.00%. Its central-bank natural language processing model finds that every component of the latest FOMC meeting was more hawkish than in June, particularly Chair Warsh's prepared remarks; however, the relevance of the Q&A portion to monetary policy was lower than in the press conferences held during Powell's tenure. The report believes Warsh's comments on policy tools, the balance sheet and the 2% inflation target drove a pronounced steepening of the yield curve. On the one hand, he questioned the effectiveness of the policy rate in combating inflation and implied that the balance sheet could play a greater role, increasing the possibility of more aggressive quantitative tightening. On the other hand, his limited emphasis on the 2% PCE target prompted market concerns that the Federal Reserve might adopt a broader inflation measure in the future. Consequently, the report believes medium-term risks are tilted toward markets pricing in more rate hikes, while inflation expectations and the term premium may rise. Regarding yield forecasts, the report raised its front-end targets by 5-10 basis points from previous levels and expects the 2-year Treasury yield to reach 4.30% by the end of 2026. It raised its 10-year forecast from 4.70% to 4.85% and its 30-year target from 5.20% to 5.40%, expecting these levels to persist through the first half of 2027. On the curve, the front end offers superior risk-adjusted carry in both absolute and relative terms, while the belly remains expensive; the report therefore continues to hold a 2-year/10-year Treasury curve steepener. The principal downside risk to this framework is that more FOMC members may seek to balance the chair's remarks, thereby restraining bear steepening. The U.S. Treasury unexpectedly announced that, beginning September 9, it would increase the maximum size of each long-duration nominal Treasury buyback from $2 billion to at least $4 billion for the remainder of the current refunding quarter; the report believes the program could also be extended. However, market functioning has already improved materially this year, and the report finds no market-functioning rationale that would compel the Treasury to expand long-end buybacks at this time. The United Kingdom has experienced 12 similar curve reactions surrounding debt-management arrangements and budget announcements since November 2022, while Japan has had five cases involving adjustments to long-end issuance since 2025. These effects generally lasted only several weeks, with diminishing marginal impact after repeated use. The report therefore does not regard expanded buybacks as a policy tool capable of suppressing yields over the long term. Fiscal financing and the investor mix further support persistently elevated long-end yields. The report forecasts cumulative tariff refunds of $125 billion across FY26 and FY27; tariff revenue is expected to total $325 billion in FY26 and recover to $400 billion in FY27. Accordingly, the FY26 fiscal deficit forecast rises to $2.020 trillion from an initial forecast of $1.955 trillion, while the FY27 deficit is forecast at $1.960 trillion, below the initial forecast of $2.050 trillion. After Federal Reserve purchases and Treasury buybacks, private-investor holdings of Treasury bills are expected to increase by $332 billion in calendar year 2026, while private net absorption of coupon-bearing Treasury issuance is projected at $1.305 trillion. The Treasury changed its wording on future nominal coupon and floating-rate note auction sizes from potentially “increasing” to potentially “changing,” creating room for adjustments in either direction. Although a financing gap remains that begins to emerge in FY27 and widens materially after FY28, the report believes the Treasury hopes this ambiguity will ease the bearish pressure created by recent yield increases. Consequently, the report postponed its expectation for maintaining current auction sizes from February 2027 to August 2027, after which it expects incremental issuance concentrated in 2-year to 10-year maturities to begin over several consecutive quarters. Demand conditions are likewise unfavorable for a material decline in yields. The pace of overseas purchases of long-term Treasuries is the slowest since 2021, and demand continues to shift toward shorter maturities. U.S. economic resilience, a more hawkish Federal Reserve and more attractive valuations in investors' domestic government bonds may all keep overseas demand weak. Commercial banks are reducing demand because of stronger loan growth and insufficiently attractive Treasury valuations, leading the report to lower its demand forecast. Assets under management in core bond funds continue to grow rapidly, and high yields may continue to attract inflows, but liability-driven investment demand is expected to be weak because fixed-income allocations are already high, pension funding ratios exceed 100%, and funding-ratio volatility has declined significantly. If the forecasts materialize, other price-sensitive investors will need to absorb an additional $543 billion of supply, keeping belly and long-end yields elevated through the remainder of this year. In international rates, developed-market curves have generally bear-steepened over the past two weeks, with long-dated Japanese government bonds underperforming. European natural gas prices have risen to their highest level since the conflict began, while European and U.K. yields have underperformed across markets. Given the risk of further U.S. market selling, thin summer liquidity, elevated energy prices and geopolitical uncertainty in the Middle East, the report reduces outright duration risk: it stops out of its 10-year German government bond long in a disciplined manner but retains a high-conviction long position in 10-year German bonds relative to U.S. Treasuries. Intra-euro-area spread valuations are tight, and carry is insufficient to offset the risk of widening in a risk-off scenario; the report therefore maintains a cautious stance and retains a short position in 10-year Italy relative to France, an overweight in 30-year EU bonds relative to swaps, and an underweight in 10-year Belgium relative to France and Germany. In the United Kingdom, the report believes the hurdle for a September rate hike is high and continues to receive the September 2026 MPC OIS rate while the market prices in approximately 5 basis points of tightening. However, given that U.S. belly yields may continue rising, it remains neutral on overall U.K. duration. The 30-year cash gilt and the 6.4% 15-year-forward, 15-year-maturity yield are considered attractively valued for long-term investors. In Sweden, economists still expect a 25-basis-point rate hike in December, but the market has priced in approximately 82 basis points of cumulative tightening by the end of 2027, which is viewed as exceeding the baseline economic scenario; receiving 1Yx1Y Stibor is therefore recommended. Norway is still expected to deliver its final rate hike in September, with a bullish view on forward rates from the second half of 2027 through the first half of 2028. In Japan, the report retains a short-belly 5s10s30s JGB butterfly and a 5-year/20-year curve steepener but remains cautious about position sizing. In Australia and New Zealand, it retains an Australian government bond 3-year/10-year curve steepener, pays 10-year AUD EFP, and pays the 2Y2Y NZD-versus-AUD interest-rate swap spread, among other positions. In foreign exchange, the U.S. dollar fell rapidly after the Treasury doubled the size of its 10-year to 30-year Treasury buybacks, but the report primarily interprets this as technical deleveraging rather than a lasting regime change. The “quasi-QE” and fiscal debasement narratives currently lack the crucial evidence of a loss of monetary-policy control: inflation breakevens remain orderly, the developed-market fiscal-theme FX basket has not outperformed, and the natural language processing indicator for the July FOMC minutes was the most hawkish in nearly two years. Long-dollar positioning may face further compression, but the report does not chase dollar weakness from current levels. For the yen, coordinated U.S.-Japan intervention may limit the upside tail risk in USD/JPY, but even faster Bank of Japan rate hikes would be insufficient to fundamentally reverse the yen-depreciation thesis; the report therefore remains confident in global carry trades. In commodities, the report notes that the largest oil supply shock on record ultimately produced only an average price outcome because inventory declines were far smaller than expected while demand destruction was much greater than expected, creating a powerful offset. Its annual average-price forecasts show WTI crude declining from $80 per barrel in 2026 to $59 per barrel in 2027 and Brent declining from $86 per barrel to $63 per barrel. The key natural-gas risk lies in Qatar: if shipping disruptions through the Strait of Hormuz persist, liquefaction-capacity utilization may be forced sharply lower or even halted in the coming weeks, and the subsequent recovery process may delay the restoration of supply until the Northern Hemisphere winter. In agriculture, aggregate investor positioning remained moderate as of August 11, but soft-commodity positioning had risen to a six-month high, driven mainly by ICE raw sugar shifting from net short to net long. In emerging markets, the two key risks of energy prices and the Federal Reserve path keep uncertainty elevated and investor positioning low. The report remains overweight emerging-market foreign exchange, believing that the cyclical outlook continues to provide support. Emerging-market rates remain market weight to reflect two-sided risks from inflation and central-bank policy. Sovereign and corporate credit also remain market weight because tight valuations offset constructive views on other fundamentals. The GBI-EM model portfolio's country positions contributed 52 basis points year to date, while overlay strategies contributed 4 basis points, for a total contribution of 56 basis points. Its one-month 5th-percentile VaR was -29 basis points, while historical VaR was -30 basis points. As of August 21, 2026, the EMBIGD model portfolio had returned 2.7% year to date versus 2.3% for the benchmark, generating 40 basis points of excess return, of which market positioning contributed 4 basis points and credit selection contributed 36 basis points. Over the past 12 months, the portfolio returned 7.9%, below the benchmark's 8.6%.

Analysis framework

The report first uses U.S. growth, inflation and employment forecasts together with FOMC communications to assess the policy-rate path, then maps policy expectations, inflation expectations and the term premium to Treasury yields across maturities and the shape of the curve. It subsequently combines the fiscal deficit, issuance plans, buyback arrangements and demand estimates for different investor groups to calculate the supply-demand gap, using historical events, regressions and risk-adjusted carry metrics to test the strategies. The international section compares duration and relative value across regions using cross-market yields, OIS forwards and spread valuations, while the foreign-exchange, commodities and emerging-market sections derive allocation views from event reactions, supply-demand shocks, positioning, valuations and model-portfolio performance.

Methodology notes

• Macroeconomic framework

  Central-bank natural language processing hawkish-dovish indicator and relevance score

  The report uses a natural language processing model to quantify the hawkish or dovish tone of FOMC statements, the chair's remarks and meeting minutes, while measuring the relevance of press-conference Q&A to monetary policy, to help determine whether policy communication has turned more hawkish.

• Fixed-income and credit analysisThree-factor interest-rate decomposition

  Policy-rate expectations, inflation expectations and term premium

  The report links changes in medium- and long-term government bond yields to future policy rates, inflation breakevens and the term premium, and accordingly raises its forecasts for 10-year and 30-year Treasuries.

• Quantitative/factor/portfolio theoryMulti-factor model

  Attribution regression for changes in the 30-year Treasury yield

  The report uses the policy rate, financial conditions, inflation breakevens, the Federal Reserve balance sheet as a share of the economy and a tariff dummy variable to explain changes in the 30-year yield. The regression shown covers the period from the end of 2020 through the end of 2025, with an R² of 97.9% and a standard error of 16.0 basis points.

• Fixed-income and credit analysis

  Risk-adjusted carry and rolldown

  The report divides three-month carry and rolldown by the three-month standard deviation of daily yield changes to compare the returns offered by Treasury maturities for the same level of volatility risk, concluding that the front end is relatively more attractive.

• Industry/sector analysis frameworkSupply-demand framework

  Reconciliation of government bond supply and investor demand

  The report derives the net supply that private investors must absorb from the fiscal deficit, Treasury issuance, Federal Reserve purchases and Treasury buybacks, then separately estimates demand from overseas investors, banks, bond funds and pensions to determine the yield level required for market clearing.

• Fixed-income and credit analysisSpread analysis

  Cross-market and intra-euro-area spread comparisons

  The report compares spreads and carry cushions between German and U.S. government bonds, euro-area member states and France or Germany, and EU bonds and swaps to construct relative-value positions rather than purely directional duration positions.

• Event-driven strategy and behavioral financeEvent-driven analysis

  Event study of Treasury buyback and issuance policies

  The report compares the current U.S. Treasury buyback adjustment with the 2023 U.S. refunding event, U.K. debt-management announcements and Japanese long-end issuance adjustments to assess the duration and marginal effects of the policy shock.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. Treasuries

  Inflation expectations, the term premium, financing needs and a rising share of price-sensitive investors jointly support persistently elevated medium- and long-term yields.

  Strengths

  The front end offers superior risk-adjusted carry.

  Weaknesses

  The belly is expensive, while demand from overseas investors, banks and pensions is weak.

  Comparison

  The report prefers a 2-year/10-year curve steepener and favors 10-year German government bonds relative to U.S. Treasuries.

  Risks

  If FOMC members collectively downplay the chair's remarks, bear steepening could be restrained.

• European and U.K. rates

  Energy prices, geopolitical uncertainty and the risk of a global long-end selloff create a cautious environment for European duration.

  Strengths

  The cross-market value of 10-year Germany relative to the United States continues to receive high-conviction support; U.K. ultra-long-end valuations are considered attractive.

  Weaknesses

  Intra-euro-area spreads are tight, and carry is insufficient to fully cushion spread widening in a risk-off scenario.

  Comparison

  The report exited the outright long position in 10-year German government bonds but retained the long position in Germany relative to the United States; overall U.K. duration is neutral.

  Risks

  Elevated natural gas prices, conflict in the Middle East and further increases in U.S. yields.

• U.S. dollar

  The Treasury's expansion of long-end buybacks triggered U.S. dollar selling, but the report believes this was primarily technical deleveraging.

  Strengths

  Stable inflation breakevens, the failure of the fiscal-theme FX basket to outperform and hawkish FOMC minutes do not support a persistent weak-dollar narrative.

  Weaknesses

  Long-dollar positions may continue to face compression.

  Comparison

  The report believes the current event differs materially from the 2023 U.S. refunding shock in sequence, initial conditions and scale.

  Risks

  If unconventional Treasury policies evolve further into evidence-backed fiscal dominance, the current view could be challenged.

• Japanese yen

  Coordinated intervention may restrain the upside tail risk in USD/JPY but is insufficient to fundamentally reverse the yen-depreciation thesis.

  Strengths

  The report continues to support the global carry-trade thesis.

  Weaknesses

  Coordinated intervention and faster Bank of Japan rate hikes could cause temporary countertrend volatility.

  Comparison

  The report believes that even simultaneous intervention and faster rate hikes would be insufficient to end yen depreciation.

  Risks

  The intensity of policy intervention and the pace of Bank of Japan rate hikes may exceed the report's assumptions.

• Crude oil and natural gas

  The oil supply shock was offset by weaker demand, while natural gas faces the risk of reduced Qatari liquefaction capacity because of shipping disruptions through the Strait of Hormuz.

  Strengths

  Constrained natural gas supply may support winter prices.

  Weaknesses

  Oil demand destruction and smaller-than-expected inventory declines limited the price response.

  Comparison

  The largest oil supply shock on record produced only an average price outcome.

  Risks

  Persistent shipping disruptions through the Strait of Hormuz could delay the restoration of natural gas supply until the Northern Hemisphere winter.

• Emerging-market foreign exchange

  The cyclical outlook supports maintaining an overweight.

  Strengths

  The report believes the cyclical backdrop remains supportive.

  Weaknesses

  Overall positioning is constrained by uncertainty over energy prices and the Federal Reserve.

  Comparison

  Compared with market-weight allocations to emerging-market rates and credit, foreign exchange receives a more constructive overweight view.

  Risks

  Energy prices and the Federal Reserve policy path are the two principal risks.

• Emerging-market rates, sovereign credit and corporate credit

  All remain market weight, reflecting a balance between constructive fundamental views and risks related to inflation, central banks and valuations.

  Strengths

  The EMBIGD model portfolio generated 40 basis points of year-to-date excess return, primarily from credit selection.

  Weaknesses

  Credit valuations are tight, while rates markets face increasingly two-sided risks.

  Comparison

  The allocation stance is less constructive than the overweight view on emerging-market foreign exchange.

  Risks

  Spread widening, inflation surprises and shifts in central-bank policy.

Key data

• 2026 U.S. GDP growth2.0% (4Q/4Q)J.P. Morgan forecast
• 2026 core PCE inflation3.5% (4Q/4Q)The report expects core inflation to remain firm
• Fourth-quarter 2026 unemployment rate4.1%Expected to remain stable throughout 2026
• Federal Reserve policy forecast25-basis-point rate hike in December 2026 to 3.75%-4.00%Only one rate hike is expected
• End-2026 2-year Treasury yield4.30%Front-end target raised by 5-10 basis points from previous levels
• End-2026 10-year Treasury yield4.85%Previous forecast was 4.70%
• End-2026 30-year Treasury yield5.40%Previous target was 5.20%
• Maximum size of each long-end Treasury buybackRaised from $2 billion to at least $4 billionEffective September 9
• FY26-FY27 tariff refunds$125 billionCumulative refund amount forecast by the report
• Tariff revenue forecast$325 billion in FY26; $400 billion in FY27FY26 accumulation is slower than previously expected
• Fiscal deficit forecast$2.020 trillion in FY26; $1.960 trillion in FY27Initial forecasts were $1.955 trillion and $2.050 trillion, respectively
• Private net absorption of coupon-bearing Treasury issuance$1.305 trillionCalendar-year 2026 forecast after Federal Reserve purchases and Treasury buybacks
• Required absorption of additional Treasury supply$543 billionExpected to be absorbed by other, generally more price-sensitive investors
• U.K. 15Yx15Y forward government bond yield6.4%The report considers the valuation attractive for long-term investors
• Swedish rate-hike pricingApproximately 82 basis points cumulatively by the end of 2027The report considers this above the baseline economic scenario; economists expect a 25-basis-point hike in December
• Annual average oil price forecastsWTI: $80/barrel in 2026 and $59/barrel in 2027; Brent: $86/barrel in 2026 and $63/barrel in 2027Forecasts from the report appendix
• Annual average natural gas price forecastsHenry Hub: $3.7 in 2026 and $3.7/MMBtu in 2027; TTF: €50 in 2026 and €46/MWh in 2027; NBP: 124 pence in 2026 and 114 pence/therm in 2027; JKM: $17.6 in 2026 and $16.3/MMBtu in 2027Forecasts from the report appendix
• GBI-EM model portfolio year-to-date contribution+56 basis pointsCountry positions contributed 52 basis points and overlay strategies contributed 4 basis points
• GBI-EM model portfolio riskOne-month VaR of -29 basis points; historical VaR of -30 basis pointsVaR corresponds to the 5th percentile of one-month returns
• EMBIGD model portfolio year-to-date performancePortfolio 2.7%, benchmark 2.3%, excess return 40 basis pointsAs of August 21, 2026; market positioning contributed 4 basis points and credit selection contributed 36 basis points

Impact & implications

The portfolio implication is not an across-the-board bet on a single direction, but rather a reduction in outright developed-market duration risk and the expression of relative-value views through a Treasury curve steepener, a long position in Germany relative to the United States, and intra-euro-area spread trades. In the U.S. dollar, the Treasury buyback shock remains insufficient to support a long-term weak-dollar conclusion. Commodities continue to be affected by the offsetting forces of supply shocks and demand destruction. In emerging markets, the cyclical environment supports an overweight in foreign exchange, but inflation, central-bank policy and credit valuations limit the degree of optimism toward rates and credit assets.

Risks

• Energy prices and the Federal Reserve policy path are the two core risks explicitly identified by the report, and both keep uncertainty elevated.
• If more FOMC members seek to balance Chair Warsh's remarks, the bear steepening in Treasuries could weaken.
• Further Treasury selling, thin summer liquidity and persistently elevated energy prices may continue to weigh on European duration performance.
• A lack of progress in the Middle East conflict and low European natural gas inventories could amplify volatility in U.K. and European rates.
• If shipping disruptions through the Strait of Hormuz persist, Qatar may reduce or halt part of its liquefaction capacity and delay supply recovery until the Northern Hemisphere winter.
• Emerging-market rates face two-sided risks from inflation and central-bank policy, while credit markets are constrained by tight valuations.
• Long-dollar positions remain vulnerable to further unwinding, potentially causing additional temporary dollar weakness.

What to watch

• Watch whether the Federal Reserve raises rates by 25 basis points in December 2026 as forecast by the report and whether FOMC members downplay the chair's policy remarks.
• Track U.S. inflation breakevens, the term premium and the steepening of the 2-year/10-year yield curve.
• Monitor whether the U.S. Treasury's long-end buyback size remains in place after the current refunding quarter and whether auction-size increases are postponed until after August 2027.
• Track the actual capacity of overseas investors, commercial banks, core bond funds and pensions to absorb additional Treasury supply.
• Monitor European natural gas prices, developments in the Middle East conflict and European winter inventory replenishment.
• Track shipping through the Strait of Hormuz and Qatari liquefaction-capacity utilization to determine whether the restoration of natural gas supply will be delayed until winter.
• Watch whether coordinated U.S.-Japan intervention and the pace of Bank of Japan rate hikes are sufficient to alter the yen-depreciation thesis.
• Track emerging-market inflation, central-bank responses and credit-spread valuations to test the overweight in foreign exchange and market-weight allocations to rates and credit.
• Monitor investor positioning in soft commodities, particularly the persistence of ICE raw sugar's shift from net short to net long.