If asked, 'How high will US interest rates go?'—The answers from 108 bond professionals
Former Bank of Japan official, PhD in Mathematics from the University of Tokyo, and former Chief Interest Rate Strategist at Nomura. I achieved the first-ever 3rd place ranking in two categories (Bonds and Securitization) in the Nikkei Veritas analyst rankings. Based on my experience of making 400 proposals a year to institutional investors, I will break down the ‘essence of finance’ that bankers and securities professionals can use directly in client conversations and internal presentations. Past articles are fully available to members (free articles transition to member-only status two days after publication).
“How high will interest rates actually go?”
When a client asks you this, how do you answer?
The results of the monthly bond market survey conducted by QUICK (September, survey period: September 29, 2026 to October 1, 2026) have been released.
This survey contains forecasts on bonds and interest rates from over 100 bond investment professionals, such as ‘How high will the 10-year government bond yields of the US, Japan, and Germany rise by the end of 2026?’
In this article, using the results of this survey as a subject, I will organize how to connect the question of ‘how high will interest rates go’ to discussions about client asset allocation.
First, we will cover US interest rates this time, and in the next installment, we will cover Japanese interest rates.
■ Main Point 1: The professionals’ upper-limit forecast is ‘5.5% for the US’
First, let’s look at the numbers. These are the forecasts for the maximum yield (peak) by the end of 2026.
The mean, median, and mode are all aligned at approximately 5.50%. In other words, the peak forecast for the US 10-year interest rate by experts is 5.5%. Grasping this number as the ‘middle’ view of the professionals will serve as a foundation for your conversations with clients.
Of course, not all respondents have the same interest rate forecast. The standard deviation, which indicates the dispersion of forecasts, is 0.18. Therefore, you can consider those with higher forecasts to be looking at around 5.48% (mean) + 0.18% (standard deviation) = 5.66%.
■ Main Point 2: What are the factors behind the rise in US interest rates?
So, why are interest rates expected to rise? This is the most interesting part of this issue.
In the QUICK survey, inflation is the primary culprit
In the same survey, we asked about the ‘factors with the greatest impact on the recent rise in US long-term interest rates.’
The number one choice selected by respondents was ‘vigilance against inflation’ at 41%.
This is followed by ‘increased corporate bond issuance by hyperscalers’ at 16%, ‘expectations of continued US interest rate hikes’ at 15%, and ‘concerns over US fiscal deterioration’ at 14%.
In short, many Japanese bond professionals view inflation as the primary culprit for high US interest rates.
The view that AI is the primary culprit
There is another perspective in the market.
When breaking down the rise in US long-term interest rates, expected inflation has remained largely flat since September, and it is real interest rates that are rising at a rapid pace—this is the current breakdown (Source: Nihon Keizai Shimbun, October 5, 2026, ‘The Anomaly of Unyielding US Long-Term Interest Rates’).
What is pushing up real interest rates is not inflation, but the ‘strength of the US economy.’ Massive investment in AI-related fields is boosting capital demand and capital expenditure, supporting the economy itself. The explanation is that the level of the ‘neutral interest rate,’ which neither heats up nor cools down the economy, is rising due to productivity improvements driven by AI.
In terms of responses to the QUICK survey, this is the theory that the increase in economic growth potential due to AI and other factors is the main cause of the interest rate hike.
Here, the core of the concept can be summarized in one sentence:
Interest rates are not failing to fall because of inflation, but because the ‘economy is too strong.’
Japanese professionals see ‘inflation’ as the primary culprit, while those on the ground in the US see ‘economic strength (real interest rates)’ as the primary culprit. Even with the same rise in interest rates, what one should be wary of next changes depending on who is identified as the culprit.
The possibility that fiscal deterioration will fuel interest rate hikes
Furthermore, there is a third perspective.
Jeffrey Gundlach, known as the ‘New Bond King,’ states that the time when interest rates will truly rise is during the next recession. His scenario is that once a recession begins, government debt will swell further due to fiscal spending to support the economy and increased interest payments, causing long-term interest rates to rise despite the recession (Source: same article).
Since he does not state that the ‘current’ factor for rising interest rates is fiscal, it must be viewed separately from the previous two.
Gundlach is stating that fiscal deterioration during a recession could ‘fuel’ future interest rate hikes.
While these are merely one market participant’s risk scenario, they are worth noting as an example showing that ‘there is not just one factor for rising interest rates.’
Inflation, real interest rates (economic strength), and future fiscal conditions. There is a possibility that multiple factors that could push up interest rates are intertwined.
■ Main Argument 3: Points to note regarding the AI theory
Earlier, I introduced the theory that the factor behind the interest rate hike is the improvement in growth potential due to AI. As one of the grounds for this, the rise in real interest rates is cited, but this requires caution.
In terms of calculation,
10-year interest rate = 10-year BEI (breakeven inflation rate) + 10-year real interest rate
is the formula, but it cannot be said that “the expected inflation rate has not risen = the cause of the interest rate hike is something other than inflation” because of that.
Let’s look at a specific example.
As shown in the figure below, in 2022, the US 10-year interest rate rose driven by real interest rates (blue) but the background to this was the Fed’s significant interest rate hikes (purple). And behind the interest rate hikes, there was a sharp rise in inflation.
During that time, the expected inflation rate (orange) was declining.
In other words, even though it was an interest rate hike driven by inflation, the expected inflation rate declined.
This is easier to understand if organized as follows:
Current inflation rate rises → interest rate hike expectations rise → 10-year interest rate rises. Due to the impact of interest rate hikes,
future inflation rates will likely subside → expected inflation rate declines
Now, from the perspective of the Fisher equation,
10-year interest rate = 10-year BEI (expected inflation rate) + 10-year real interest rate
in this breakdown, it can also be interpreted that real interest rate = real growth rate.
This leads to the theory that the cause of the interest rate hike is AI, but as you can see from the previous example, “a rise in real interest rates” does not necessarily mean “a rise in the growth rate.”
While expected inflation rates and real interest rates are convenient indicators, it is better to keep in mind that each moves due to various factors.
■Main Point 4: How to use these figures for client asset allocation
Now, this is where the practical work begins.
What is valuable for bankers and securities professionals is translating interest rate forecast figures into “decision-making material for client asset allocation.”
In short, how to invest in stocks and bonds.
If the cause of the interest rate hike is inflation, then with the passing of interest rate hikes and inflationary pressure due to the situation in the Middle East, interest rates will likely become easier to lower from next year onwards. In this case, since it will be a normal economic cycle, the high interest rates will lead to an economic slowdown, and stocks will be sluggish.
On the other hand, if rising growth rates due to AI are the cause of higher interest rates, interest rates will not easily fall. In this case, the stock prices of AI-related companies and companies that can leverage AI for growth will likely remain firm, but other companies will be prone to declines due to the impact of high interest rates.
Also, if fiscal deterioration due to an economic recession pushes interest rates up, this would also be a pattern where interest rates do not fall. This would likely put downward pressure on the stock prices of all sectors, including AI-related ones.
Among these, the only scenario where ‘both stocks and bonds fall’ is the fiscal deterioration pattern. In the other two patterns, diversified investment in stocks and bonds becomes effective. If you are worried about US fiscal conditions, you could also consider incorporating gold.
Furthermore, considering that if you buy 10-year US Treasury bonds now, you will receive a 5% interest rate every year, US bonds should be an option, at least when thinking on a multi-year span.
However, it is true that the future path of interest rates is difficult to read. Rather than thinking now is the time to buy, it might be better to diversify your timing or wait until the end of interest rate hikes is near.
Incidentally, the professional investors cited in newspaper articles and the like are mainly people who are required to generate short-term returns, such as hedge funds.
Even if they are wary of rising interest rates, it is necessary to consider separately whether that applies to individual investors who are long-term investors.
■ You can explain it to your clients tomorrow like this
‘Many professionals view the ceiling for the 10-year US interest rate as 5.5% within the year. However, there are various views regarding the background of the interest rate rise, and in the end, the future path of interest rates is difficult for even professionals to foresee.’
‘At times like this, diversifying assets (not just stocks, but also bonds, etc.) and diversifying investment timing are effective in protecting your assets.’
If you can say this, you will become not a ‘person who predicts the market’ to your client, but a ‘person who thinks together about how to protect assets’.
■ Summary
・In the QUICK Monthly Survey (September), the forecast for the ceiling of the 10-year US interest rate through the end of 2026 is around 5.5%.
・In the same survey, respondents see ‘inflation vigilance’ (41%) as the main cause of high US interest rates, but there are also views that see growth driven by AI as the background for the interest rate rise.
・Mr. Gundlach expresses the view that ‘the real interest rate rise will come with the next recession.’ If this is correct, both stocks and bonds will fall, but in other patterns, diversified investment is effective.
■ Points to note
The ceiling forecast is merely an aggregate of the survey respondents’ views and is not a specific prediction or investment decision. Each view introduced in this article (breakdown of the US economy, Mr. Gundlach’s scenario, etc.) is also an example of market participants’ perspectives. Please check the latest primary information and make decisions on actual interest rate levels and asset allocation at your own responsibility.
Thank you for reading to the end. Since free articles become unavailable two days after publication, if you would like to see past articles, we recommend joining our membership. Takenobu Nakajima’s Money.lab | Takenobu Nakajima (Former Bank of Japan, PhD in Mathematics from the University of Tokyo)