Investing.com – While U.S. Treasury yields are expected to decline through the rest of 2025, the yield curve could still steepen, according to analysts at Capital Economics.
Benchmark 10-year US Treasury yields recently hit multi-month highs as investors worried about the prospect of a potential rate cut by the Federal Reserve this year.
After cutting borrowing costs by a full percentage point in 2024, policymakers have signaled they will tread carefully on future drawdowns, especially as uncertainty looms over the policies of President-elect Donald Trump’s incoming administration. Economists have warned that Trump’s plans, particularly his threat to impose sweeping import tariffs on allies and adversaries alike, could renew pressure on inflation — and consequently strengthen the case for the Fed to introduce further rate cuts slowly, if at all.
But those concerns eased somewhat on Wednesday thanks to December’s reading of consumer price growth. The data showed that while core US consumer prices rose as expected in December, a core measure that strips out volatile items like food and fuel rose more slowly than expected.
Bets that the Fed will decide to introduce several rate cuts by the end of the year rose after Wednesday’s figures and remained in play despite other solid economic indicators later in the week.
Treasury bond yields, which move inversely with prices, fell in response.
“The sell-off in government bond yields has reversed in the back half of this week,” Capital Economics analysts said in a note to clients on Friday.
But they noted that the trend is concentrated mostly at the long end of the yield curve. That led to a “significant” steepening of the curve, analysts said, adding that it “suggests to us that short-term expectations of monetary policy — which should in principle directly affect short-term bond yields — have disappeared lately. I haven’t been in the driver’s seat. “
This so-called “bear steepening,” in which long-term yields rise more than short-term yields, has left the bond market in a “bit of an unusual place” compared to previous Fed easing cycles.
They argued that the next moves for bonds can be determined by two key questions: What caused such a sharp rise in long-term yields in the first place, and how likely is it to continue?
One possible explanation could revolve around rising Treasury premiums — the fee investors demand for bearing the risk that interest rates may change over the life of the bond — as investors brace for potential volatility during the Trump administration, analysts said.
Still, while they noted that much appears to depend on how Trump’s policies progress over the next few years, “all signs to us seem to point to slightly lower yields.”
Their forecast is 4.50% by the end of 2025, about 10 basis points below current levels, while the decline at the front end of the curve is considered more “pronounced”.
