Treasury yields have been in a summer lull since hitting their highest level since 2011 in May. Autumn should pave the way for a renewed push higher in yields, according to one top strategist.
Michael Schumacher, head of interest rate strategy at Wells Fargo, said a seasonally weak September and October could be even worse this year.
"Weakening demand, heavy supply, improving trade – it seems like a recipe for higher yields," said Schumacher on CNBC's "Futures Now" on Tuesday.
A supply-demand imbalance that drove prices lower earlier in the year should get even worse as the month progresses, he said. Greater supply and weaker demand pushes bond prices lower and bond yields higher. Yields move inversely to prices.
"You've got a pretty heavy supply of Treasurys for a while, really as far as the eye can see with the big budget deficit," said Schumacher. "Against that, demand is weakening."
The Treasury Department has leaned on bond auctions this year to fund ballooning deficits. Last week alone, the department put up more than $100 billion in Treasury notes.
The expiration of a one-time tax quirk could also lead to reduced demand from U.S. corporate and pension buyers, said Schumacher.
"Corporates had this tremendous tax incentive until Sept. 15. They can effectively put in contributions to their pensions, deduct that using the old high tax rates versus the new low rates," Schumacher said. "As we approach and then pass Sept. 15 which is not too far away, we think those pensions step back their buying of Treasurys."
Meanwhile, the Fed has shown a commitment to continue on its tightening monetary policy path, working to raise the federal funds rate and reduce its balance sheet holdings simultaneously.
Fed Chair "Jay Powell seems like the happiest central banker I've ever seen," said Schumacher. "When you listen to him speak, it seems like the economy is in great shape, the markets are good, everything seems just fine so as far as he's concerned, he seems really content with the path of policy."
The Fed held $1.697 trillion in mortgage-backed securities and debt on its balance sheet as of the end of August, according to St. Louis Fed data. That was its lowest amount since October 2014.
The Trump administration's progress on a trade deal with Mexico, and efforts to advance talks with Canada, have calmed tariff fears, added Schumacher. Worries over trade had made safe haven assets such as bonds more favorable to investors.
Schumacher and Wells Fargo see the 10-year yield reaching 3.20 percent by year-end.