• HSBC (HSBC) raised its end-2026 forecasts for 2-year U.S. Treasury yields to 4.20% and 10-year yields to 4.65%, citing asymmetric inflation risks and persistent fiscal deficits.
  • The bank maintains a no-change base case for Fed policy through 2026–27 but sees a near-even chance of a 25-basis-point hike at the September FOMC meeting.
  • Market pricing already implies a higher probability of a September hike, with the 10-year yield surpassing 4.8% amid supply and deficit worries.

A Hawkish Shift

HSBC lifted its U.S. Treasury yield forecasts, arguing that the Federal Reserve’s inflation risks have become more asymmetric. The bank’s revised projections reflect both a credible near-term rate-hike risk and durable upward pressure on longer-dated yields.

The immediate catalyst was a hawkish shift in Fed communication. Chair Kevin Warsh reiterated a commitment to returning inflation to 2% and indicated policy may need to tighten if inflation does not improve convincingly. Governor Michael Barr echoed this, saying the Fed should act decisively if disinflation stalls. Markets have already moved further than HSBC’s “near-even” characterization, with implied odds of a September hike around 56%–70% following Jackson Hole remarks.

The Curve Call

HSBC’s forecast is not just about higher rates; it’s a curve-shape call. The bank projects 2-year yields to fall from 4.20% at end-2026 to 3.95% by end-2027, consistent with eventual easing. Meanwhile, 10-year yields are expected to rise from 4.65% to 4.75% over the same period, implying that deficits, debt supply, and term premium outweigh the pull from lower expected short-term rates.

Persistent fiscal deficits are a key driver. The Congressional Budget Office projects a fiscal-2026 deficit of $1.9 trillion, or 5.8% of GDP, rising to $3.1 trillion by 2036. Net interest costs are expected to climb from 3.3% of GDP in 2026 to 4.6% in 2036. This has contributed to the 10-year yield rising above 4.8%, its highest since October 2023, and the 30-year reaching 5.27% on July 31, a level not seen since 2007.

Mixed Implications

For HSBC, higher yields have mixed effects. They can support lending margins and fixed-income trading, but also raise credit-loss risk and pressure borrowers. The bank’s first-half 2026 revenue rose 6% to $38.2 billion, with profit before tax up 6% to $20.4 billion. Its CET1 ratio stood at 14.1%.

Globally, higher Treasury yields tighten financial conditions, strengthen the dollar, and increase costs for dollar-denominated debt abroad. Emerging markets face potential capital outflows. The government is attempting to improve long-end liquidity by expanding Treasury buybacks to at least $4 billion per operation starting September 9, though this doesn’t reduce total borrowing needs.

The principal risk to HSBC’s view is two-sided. A sharper slowdown or convincing inflation decline could pull yields down. But persistently high inflation, wider deficits, or oil shocks could push long yields beyond forecasts. As one strategist put it, “The bond market is finally pricing in the fiscal reality.”

This article was updated to reflect current market pricing and the latest Treasury yield levels.