Nominal gross domestic product has been growing at a yearly rate of 5.75% over the past four quarters, as the underlying economy continues to grow at its above-potential pace and as the torrid spending spree continues.
The robust rate of nominal GDP will continue to push rates higher and presents an upside risk to our 2027 year-ahead forecast on the 10-year Treasury yield, which should stand at 5.1% properly measured and which we forecast will trade in a range between 4.9% and 5.4% next year.
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It should come as no surprise that interest rates are moving higher as well.
Nominal GDP is defined as real (inflation-adjusted) economic growth plus the inflation rate.
Interest rates are determined by expectations for short-term interest rates (the impact of inflation and economic growth on monetary policy) plus a risk premium to account for potential changes in monetary policy.
Recall that U.S. monetary policy includes dual mandates for price stability and full employment. With both economic growth and inflation moving higher, we can expect high levels of interest rates.
The takeaway
The yields on 10-year Treasury notes have been above 4% for more than a year, briefly moving above 5% in September before the flight from the equity market, based on expectations for economic growth and inflation.
Watch the growth rate of nominal GDP for the direction of interest rates.