U.S. long-term Treasury yields remain elevated near multi-decade highs, and Barclays suggests that beyond inflation, fiscal deficits, and increased supply, a deeper structural shift in the Treasury market is driving up long-term borrowing costs.
The buyer base for U.S. Treasuries has markedly shifted from official institutions like the Federal Reserve and foreign central banks toward private investors such as mutual funds, households, and other entities that prioritize investment returns. In a recent report, Barclays strategists Demi Hu and Anshul Pradan noted that private investors now hold approximately 73% of the U.S. Treasury market, a significant increase from roughly 50% a decade ago. As these investors are more sensitive to price and expected returns, they may demand higher yield compensation to absorb the growing supply of long-term Treasuries in a persistently high-inflation environment.
Official demand wanes, private investors become primary buyers of new Treasury supply
Barclays stated that "the buyer base for U.S. Treasuries has changed." Since the Federal Reserve began shrinking its balance sheet in 2022, the Fed's own demand for Treasuries has declined, while demand from official institutions like foreign central banks has also gradually weakened. This has made private investors the marginal buyers of new Treasury supply. According to Barclays estimates, private investors now hold about 73% of U.S. Treasuries, compared to roughly 50% a decade ago. The bank's demand elasticity indicator, weighted by different investor holdings, shows that the U.S. Treasury market has become significantly more dependent on price-sensitive investors over the past decade.
This distinction is particularly important for long-term yields. Unlike official institutions that buy Treasuries for monetary policy or foreign exchange reserve management purposes, mutual funds, foreign private investors, banks, and households focus more on expected investment returns when allocating assets. Therefore, as these investors become the primary backstop for new Treasury supply, the U.S. Treasury may need to offer higher yields to attract enough capital to absorb bond issuances.
The 30-year Treasury yield has remained above 5% for an extended period, marking the longest streak since 2007. Data shows that since the 30-year yield surpassed 5% this year, it has stayed above that level for 41 consecutive trading days through Tuesday, the longest stretch since 2007. The longest continuous period in 2007 was 50 trading days. On Tuesday, the 30-year yield was around 5.23%, having previously approached multi-decade highs near 5.28%. Long-term Treasury prices have also faced sustained pressure this year. The Bloomberg index tracking Treasuries with maturities over 20 years has fallen 3.8% year-to-date, compared to a 4.6% gain in 2025.
The market faces new tests this week. Investors are awaiting the latest U.S. inflation data, while the Treasury plans to auction $25 billion in long-term bonds on Thursday, with market expectations that the issuance yield could hit its highest level since August 2001.
Inflation and fiscal deficits boost term premium
Beyond the shift in buyer composition, persistent U.S. inflation and fiscal conditions are also increasing the compensation investors demand for holding long-term Treasuries. Over the past five years, U.S. inflation has consistently exceeded the Federal Reserve's target, and since the COVID-19 pandemic in 2020, the federal fiscal deficit has expanded significantly. In this environment, investors are increasingly concerned about the inflation and interest rate risks of holding fixed-rate bonds for extended periods, demanding a higher "term premium."
Barclays pointed out that as long-term Treasury yields approach multi-decade highs again, the market is paying more attention to the role of fiscal deficits, long-term bond supply, and inflation risk premiums in driving long-term rates. This effect is especially pronounced for 20-year and 30-year bonds. Traditional buyers of ultra-long Treasuries include insurers and pension funds that need to match liabilities spanning decades. However, due to the fixed coupon rates on long-term bonds, their real returns are more vulnerable to erosion from persistently high inflation compared to short-term bonds.
Long-term Treasuries may need higher yields to attract buyers
Barclays believes that as mutual funds, households, banks, and overseas private capital continue to increase their share of the U.S. Treasury market, long-term bonds may need to offer structurally higher term premiums. In other words, even if the Treasury issues the same amount of debt, the market, given its greater focus on price and returns, might require larger price discounts—meaning higher yields—to generate sufficient demand to complete the issuance.
Barclays stated that as the Treasury market becomes increasingly reliant on price-sensitive private investors, "the same amount of supply may require a greater yield concession to be absorbed by the market." This implies that even if the Federal Reserve adjusts short-term policy rates in the future, long-term Treasury yields may not necessarily decline in tandem. The rising share of private investors, widening fiscal deficits, increased long-term bond supply, and persistent inflation risks are collectively creating upward pressure on the term premium of long-term Treasuries, potentially pushing it back toward the higher levels seen before the global financial crisis.
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