From Macro to Micro | May 29, 2026

Market Strategy 

by Talley Leger, Chief Market Strategist

Treasury Yields: Water Finds Its Own Level

In my June 4, 2025, Market Strategy Flash, “Why bond yields have increased around the world,” I argued that rising yields were driven by improving investor risk appetite as expressed by more demand for “pro-cyclical” assets (i.e., stocks) and less demand for “defensive” assets.

This week, I evolve the narrative from simply explaining why bond yields are higher in 2026 to a discussion about why their current levels may be healthy and sustainable, and why the Federal Reserve (Fed) should adopt a “do no harm” policy.

1. Rate Risk – In standard economic theory, sovereign or government bond yields have two components: a) Expectations for the future path of short-term interest rates; and b) the “term premium,” which is the compensation that investors require for taking the risk that interest rates may change over the life of the bond. Mathematically, the US Treasury “term premium” is equal to the 10-year US government bond yield minus the average expected federal funds rate over the next 10 years. Conceptually, the “term premium” – which has risen sharply – is a nebulous “catchall” for a variety of different forces unexplained by monetary policy (e.g., supply, inflation, real growth, expected volatility).

Unfortunately, the bond “vigilantes” and “inflationistas” have “weaponized” the “term premium” as a sinister source of the backup in bond yields year to date (YTD). In my view, this isn’t a Fed “freak-out” or an inflation “scare.” It’s a “normalization” of the compensation investors demand for holding long-duration assets.

Investors require an extra 0.8 ppts for taking interest-rate risk

Sources: FRED, WCG, 5/26/26. Notes: Real = Inflation adjusted. Breakeven = The nominal yield minus the real yield or the market-implied 10-year expected inflation plus an inflation risk premium. Indices are unmanaged and cannot be invested in directly. Past performance does not guarantee future results.

Decomposition – Beneath the surface, the YTD increase in the 10-year Treasury yield has been spurred by a repricing of “duration” risk, not policy “panic:”

• 4.6%: The “nominal” 10-year Treasury yield has “choked up” by 9% YTD (read: bond prices have fallen), mirroring the S&P 500 rally in the same time frame (read: stock prices have risen).
• 0.8%: The “term premium,” which has surged over 45% YTD, has been mislabeled as the “bad actor” in the bond market drama. In other words, investors now require an extra 0.8 percentage points (ppts) to buy and hold a 10-year Treasury as opposed to buying and holding 1-year Treasuries each year for the next 10 years.
• 2.2% & 2.4%: By comparison, the “real” yield and the “breakeven” inflation rate have experienced modest moves of 12% and 7% YTD, respectively.

Key Takeaway – The Treasury selloff is largely explained by the “term premium,” an often-misunderstood expression that captures supply, inflation, real growth and expected volatility. However, investors are just asking for some extra yield to compensate them for bearing interest-rate risk, rather than bracing for restrictive monetary policy (see the chart above).

2. Underwriting Growth – Sovereign bond yields have continued their global ascent, but the story line is one of economic resilience, not distress. While bond yield backups can trigger market anxiety, my research shows the cost of money is reasonable and supportive of economic growth.

Mind the Gap – The spread between 6.0% year-over-year (Y/Y) nominal gross domestic product (GDP) growth and a 4.6% 10-year Treasury yield demonstrates that the current level of market interest rates is supportive, not restrictive, of business and consumer activity.

Key Takeaway – With the 10-year Treasury yield resting 1.4 ppts below nominal GDP growth, financial conditions remain accommodative. From my lens, the economic and earnings expansion has plenty of runway, provided our central bank’s primary mandate is: Do no harm (see the chart below).

The cost of money is reasonable and supportive of economic growth

Sources: BEA, FRED, WCG, 5/26/26. Notes: NBER = National Bureau of Economic Research. GDP = Gross domestic product. Indices are unmanaged and cannot be invested in directly. Past performance does not guarantee future results.

3. Valuation Anchor – Despite the fear mongers’ bearish narratives, the underlying trend in core inflation suggests that the 10-year Treasury isn’t a ticking time bomb. Rather, intermediate-term US government bonds sit squarely in “fair value” territory.

• “Fair” Value: My simple 10-year Treasury model – a statistical regression based on the 10-year moving average of the Y/Y % change in the Consumer Price Index (CPI) Less Food and Energy – estimates “intrinsic” value at 5.0%.
• Current Level: With yields hovering below 4.6%, US government bonds are trading well within their minus/plus one standard error bands of 3.6% to 6.3%.

Key Takeaway – For those worried that domestic fixed-income markets are overextended, my straightforward 10-year Treasury valuation model should provide some reassurance (see the chart below).

10-year Treasury yields seem fairly valued

Sources: BEA, BLS, FRED, WCG, 5/26/26. Notes: SE = Standard error. Indices are unmanaged and cannot be invested in directly. Past performance does not guarantee future results.

Bottom Line – When interest rates find a new “equilibrium,” it’s a feature – not a bug – of price discovery, a dynamic marketplace, less government intervention and a brighter economic outlook. More importantly, businesses and consumers can afford the cost of money when it’s below the pace of nominal GDP growth and aligns reasonably well with long-term inflation trends. In my humble opinion, we’re at a critical juncture where the Fed doesn’t need to slam on the monetary brakes … it needs to let our growth engine run.

Recent and relevant Market Strategy Flashes:

Portfolio Strategy

by Jim Worden, CFA®, CMT®, CAIA®, Chief Investment Officer

Cyclically Secular? Rethinking the Memory Cycle 

What used to be a volatile cyclical path for dynamic memory (DRAM) fabricators has, at least temporarily, turned into more of a secular demand story for memory. We still believe the cycle will eventually come to an end, but right now, it does not look like that will happen anytime soon.

Years ago, I upgraded my computer’s memory, or RAM. The goal was to make it a little faster when multitasking or maybe to make my large Excel workbook load a little faster.

Fast forward to today: demand for GPU compute is high, and supply is constrained. That constraint comes from the inability to produce it fast enough, along with constant improvements in speed, capacity, and power efficiency. The charts below show DRAM prices for DDR3, DDR4, and DDR5—the different generations of dynamic memory.

DDR3 came out in 2007. It required more power, and it is now considerably slower than DDR4. DDR4 came out in 2014. DDR4 is 50% faster than DDR3 and requires just 80% of the power. DDR5 came out in 2020, is 160% faster than DDR3, and uses 92% of the power required by DDR4. All three types of DRAM have shot up considerably in price. The reason is that the three main suppliers of memory—Samsung, SK Hynix, and Micron—are also the producers of high bandwidth memory (HBM), which goes into AI compute. AI compute is crowding out supply for DRAM in other areas, including cell phones, computers, and servers. As a result, there may be some temporary inflationary pressure on other items, unintentionally driven by AI growth and demand. This brings back memories of the new cars that were backlogged during the pandemic due to a chip shortage.

According to BofA’s Vivek Arya, Micron has “3-5 year long-term agreements” with hyperscalers at fixed pricing for the current HBM3E generation as well as the newer, faster HBM4 generation. The shift from floating prices and much shorter contracts to fixed pricing and longer-term contracts feels permanent and more secular, but we would probably describe this as more of an elongated super-cycle than something permanent or secular.

That shift in supply, pricing, and contract structure is what connects the memory price charts to the market reaction in the major memory producers.

The massive demand for HBM has sent the prices of SK Hynix, Micron, and Samsung shares surging higher. Samsung’s stock price has not gone up as much, as Samsung also produces TVs, cell phones, refrigerators, and many other items, and memory made up only 56% of the company’s revenue in Q1 2026. For SK Hynix and Micron, memory is virtually all they do.

We believe that the high demand for compute, and likewise memory, will subside. However, the timing remains unclear. We continue to manage portfolios for both opportunities and risks, and we will continue to trim positions as needed to prudently keep risk budgets in line with investment objectives.

Sources

Chart data: Bloomberg, as of 5/28/26.

DDR speed and power comparisons: JEDEC specifications for each DDR generation: JESD79-3 (DDR3), JESD79-4 (DDR4), and JESD79-5 (DDR5).

Disclosures 

The views expressed are for informational and educational purposes only and are subject to change without notice.

This material is not intended as, and should not be interpreted as, individualized investment advice or a recommendation to buy, sell, or hold any security, sector, industry, or investment strategy.

References to specific companies, securities, sectors, or industries are for illustrative purposes only and should not be construed as investment recommendations.

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Past performance is not indicative of future results. No investment strategy can guarantee a profit or protect against loss.

Forward-looking statements, including views about future demand, pricing, supply, or industry cycles, are based on current expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially.

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