Are Treasury bond yields headed (much) higher?

Theory says the ten-year risk-free bond yield should be equal to nominal GDP growth. With inflation expectations currently at 2.25% or above and consensus GDP growth for 2010 at 2.5% and above, the 10-Y Treasury bond yield could easily rise to 4.75% in the first part of the year, which incidentally, is about the level it averaged during the past half-decade.

However, I am expecting both renewed credit concerns and disappointments regarding GDP growth. This should at least put a cap on bond yields at around 4.75%. Since I am quite pessimistic in assessment of the economy, we should also see at some point a renewed flight to quality (well, quality is becoming less and less appropriate to describe treasuries) which could bring yields back towards 3-3.5%.

To sum up, 2010 could see swings in yields almost as wide as those we have seen in 2009.

To break the 4.75% level, we are going to need to witness "tangible" inflation concerns, and this should not be a problem before 2011 at least.