Investing.com – While US Treasury yields are expected to decline through the rest of 2025, the yield curve may continue to steepen, according to analysts at Capital Economics.
Benchmark 10-year U.S. government bond yields recently reached multi-month highs, as investors worry about expectations of potential interest rate cuts from the Federal Reserve this year.
After cutting borrowing costs by a full percentage point in 2024, policymakers have indicated that they will take a cautious approach to future withdrawals, especially with uncertainty looming over the policies of the incoming administration of President-elect Donald Trump. Economists have warned that Trump's plans, especially his threat to impose sweeping import tariffs on allies and adversaries alike, could put renewed upward pressure on inflation — and thus strengthen the Fed's case for rolling out more interest rate cuts slowly, if they happen at all. .
But those concerns were eased somewhat on Wednesday thanks to December's reading of consumer price growth. The data showed that while headline US consumer prices rose as expected in December, the core measure that excludes volatile items such as food and fuel rose at a slower rate than expected.
Bets that the Fed will opt to roll out some interest rate cuts by the end of the year were boosted after the numbers were released on Wednesday, and remained in place despite other strong economic indicators later in the week.
Treasury yields, which tend to move inversely with prices, fell in response.
“The sell-off in Treasury yields has been reflected in the back half of this week,” Capital Economics analysts said in a note to clients on Friday.
But they note that the trend is mainly concentrated at the long end of the yield curve. This led to a “significant” steepening of the curve, analysts said, adding that this “suggests to us that the near-term outlook for monetary policy – which in principle should directly influence short-term bond yields – has not seen a safe haven”. “I haven't been in the driver's seat lately.”
This so-called “downward slope,” in which long-term yields rise by more than short-term yields, has left the bond market in a “somewhat unusual place” compared to previous Fed easing cycles.
They argued that the next moves in bonds could be determined by two key questions: What caused long-term yields to rise so sharply in the first place, and how likely is it that they will resume?
Analysts said one possible explanation could revolve around rising Treasury bond premiums — the compensation investors require for bearing the risk of interest rates changing over the life of bonds — as investors brace for potential volatility during a Trump administration.
However, while they noted that much depends on how Trump's policies progress over the next few years, “all the signs, in our view, seem to point to slightly lower returns.”
Their forecast has it ending 2025 at 4.50%, about 10 basis points below its current level, while declines at the front of the curve are considered “more pronounced.”
