Markets tend to focus on the Federal Reserve. They should also be watching the Treasury.

Recent reporting highlights expectations that long-term U.S. Treasury yields may remain elevated or rise further in 2026, driven in part by heavy issuance and the evolving pace of balance sheet reduction. That combination shifts attention from monetary policy to supply mechanics.

When supply expands, pricing power changes.

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The U.S. continues to finance elevated deficits.

That means more bonds must be absorbed by private markets. At the same time, the Federal Reserve is no longer the marginal buyer it once was. Balance sheet normalization has reduced the central bank’s footprint in Treasury markets.

More supply. Fewer structural buyers. That dynamic widens the term premium over time.

For years, long-term yields were suppressed by central bank intervention and global demand for safe assets.

Now the equation looks different.

If markets begin to price sustained issuance without matching demand growth, long-dated bonds must offer higher compensation. That compensation shows up in yields.

Higher yields are not just a bond market story. They ripple across mortgages, corporate borrowing, and equity discount rates.

Duration sensitivity increases as rates stabilize at higher levels.

When long-term yields drift higher for structural reasons, equity valuations adjust.

Discount rates matter most for growth sectors and longer-duration assets. If the 10-year Treasury climbs because of supply pressure rather than inflation panic, the impact is more gradual but still meaningful.

Equities can tolerate rising yields driven by growth. They struggle more with yields rising because of fiscal arithmetic.

Markets will be forced to distinguish between the two.

The evolving pace of balance sheet reduction still matters.

If the Federal Reserve slows or pauses the pace of runoff, it signals sensitivity to liquidity conditions. That can cushion volatility, but it does not eliminate issuance pressure.

Liquidity management and supply pressure are separate forces.

Investors should not confuse tactical stabilization with structural resolution.

For much of the past decade, duration was supported by central bank demand and global savings flows.

Today, fiscal expansion and issuance scale are becoming primary drivers. That shifts the anchor point for long-term yields.

If supply becomes the dominant force, investors must demand higher compensation to hold duration risk. That repricing does not happen overnight. It happens gradually, then suddenly.

The Treasury market is not flashing crisis. It is signaling adjustment. And adjustment in the risk-free rate resets everything priced off of it. Treasury supply is becoming the structural driver of long-term yields.

Not investment advice. Markets move fast. So should you.