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Barclays Capital’s head of U.S. rates research, Anshul Pradhan, warns that the U.S. 30-year Treasury yield could climb to 6%, arguing that the current bond market selloff has yet to fully price in the risk of sustained productivity acceleration driven by AI investment. He contends that the market still treats the elevated neutral interest rate as a cyclical phenomenon, but if tech giants’ AI capital expenditure translates into structural productivity gains, the Federal Reserve will have little reason to cut rates, forcing investors to revise long-term rate expectations upward. The 30-year Treasury yield broke above 5.61% this week for the first time since 2002. The report also outlines two alternative scenarios: a cooling of capital expenditure that sparks a Treasury rally, or fiscal deterioration that pushes long-end risk premiums higher.
Key Elements
Barclays Capital warns that the U.S. 30-year Treasury yield still has room to climb to 6%, arguing that the current bond market selloff has not fully priced in the possibility of sustained productivity acceleration. In a new report, Anshul Pradhan, the firm’s head of U.S. rates research, wrote that if the artificial intelligence (AI) investment boom drives a structural improvement in U.S. productivity, the market’s pricing of the long-term neutral interest rate will be forced to reset significantly higher.
The market, he wrote, “still assumes that the currently elevated neutral rate will ultimately prove to be cyclical rather than structural.” Under this cyclical framework, investors expect the Federal Reserve’s rate hikes were aimed at suppressing inflation, but “do not view this increase as permanent.”
That logic now faces a critical test. U.S. tech giants are expected to spend as much on AI infrastructure this year as they did over the previous three years combined. If this wave of capital expenditure effectively translates into sustained productivity gains, Pradhan argues the Federal Reserve “will have far less reason to bring the policy rate back down to levels currently implied by the forward curve.”
In that scenario, investors “will need to revise upward their expectations for the terminal policy rate, thereby pushing long-term Treasury yields higher.” The report further extrapolates that, all else equal, if long-term estimates gradually converge toward short-term estimates, the fair value of the 30-year Treasury yield would rise to 6% — a level last breached in June 2000.
The U.S. 30-year Treasury yield briefly broke above 5.61% this week, the first time since 2002, and has risen a full percentage point from its low on March 2 of this year. The selloff comes against a backdrop of renewed scrutiny of the U.S. fiscal outlook and the Federal Reserve’s policy path.
Three Possible Scenarios
Barclays’ report does not offer a single conclusion. Pradhan also outlines two alternative paths.
The first scenario involves a cooling of the capital expenditure boom. If corporate AI investment slows and economic growth momentum weakens, the Federal Reserve “will have less reason to keep rates elevated,” and Treasury prices could rebound. In this case, he notes, intermediate-maturity Treasuries would benefit the most.
The second scenario focuses on fiscal risk. If persistently rising yields push government interest costs higher and further deteriorate the U.S. fiscal outlook, investors may “demand higher returns to be willing to hold U.S. government debt.” The report notes that in this scenario, even without the support of sustained productivity acceleration, 10- to 30-year Treasury yields could face the greatest upward pressure.
The report arrives at a time when global bond markets are confronting multiple pressures. Concerns over increased U.S. government debt supply, uncertainty surrounding the Federal Reserve’s rate-cut path, and the profound implications of AI investment for the economy’s potential growth rate collectively form the macro backdrop for the current rise in long-dated Treasury yields.
Market Implications
Barclays’ view highlights a key divergence: bond market participants have yet to reach a consensus on whether the neutral interest rate is temporarily elevated or structurally shifting higher. If AI investment does indeed drive a structural productivity improvement in the U.S. akin to the late 1990s, the Federal Reserve’s terminal policy rate would land significantly above levels implied by the current forward curve, exerting sustained pressure on long-dated Treasury valuations.
For investors, this means the traditional “buy long-duration bonds and wait for rate cuts” strategy may no longer work. In a scenario of accelerating productivity, the risk premium at the long end of the curve needs to be repriced; in a fiscal deterioration scenario, the “risk-free asset” status of long-dated Treasuries would also be tested. The three paths outlined in the Barclays report effectively represent a triple challenge to the current market consensus, making portfolio duration management considerably more complex.
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