Is the Treasury sell-off over? Capital Economics weighs in

Investing.com – Whereas US Treasury yields are anticipated to fall over the remainder of 2025, the yield curve may nonetheless proceed to steepen, in keeping with analysts at Capital Economics.

Benchmark 10-year US authorities bond yields just lately touched multi-month highs as traders fretted over the outlook for potential Federal Reserve rate of interest cuts this 12 months.

After slashing borrowing prices by a full share level in 2024, policymakers have signaled that they’ll take a cautious method to future drawdowns, particularly as uncertainty looms over the insurance policies of the incoming administration of President-elect Donald Trump. Economists have warned that Trump’s plans, notably his risk to impose sweeping import tariffs on allies and adversaries alike, may place renewed upward stress on inflation — and subsequently bolster the case for the Fed to roll out extra fee cuts slowly, if in any respect.

However these worries had been considerably assuaged on Wednesday due to the December studying of shopper value progress. The info confirmed that whereas headline shopper costs within the US rose as anticipated in December, the underlying measure stripping out risky objects like meals and gasoline had elevated at a slower-than-anticipated fee.

Bets that the Fed would decide to roll out a few fee cuts by the tip of the 12 months had been boosted after the publication of the figures on Wednesday, and remained in play regardless of different strong financial indicators later within the week.

Treasury yields, which have a tendency to maneuver inversely to costs, dropped in response.

“The sell-off in Treasury yields has gone into reverse within the again half of this week,” the Capital Economics analysts stated in a observe to purchasers on Friday.

However they famous the pattern was concentrated primarily on the long-end of the yield curve. This has led to a “vital” steepening within the curve, the analysts stated, including that this “suggests to us that near-term expectations for financial coverage — which in precept ought to immediately have an effect on the yields of short-dated bonds — have not been within the driver’s seat recently.”

This so-called “bear steepening”, through which long-end yields rise by greater than short-end ones, has left the bond market in a “little bit of an uncommon place” in comparison with earlier Fed easing cycles.

They argued that the following strikes in bonds may very well be decided by two key questions: What was making long-end yields to rise so sharply within the first place, and the way seemingly is it to renew?

One potential clarification may revolve rising Treasury time period premia — the compensation traders require for bearing the danger that rates of interest might shift over the lifetime of a bond — as traders gear up for potential volatility through the Trump administration, the analysts stated.

Nonetheless, whereas they flagged that a lot appears to rely upon how Trump’s insurance policies progress over the following few years, “all indicators appear, to us, to level to barely decrease yields.”

Their forecast is for the 10-year Treasury yield to finish 2025 at 4.50%, about 10 foundation factors under its present stage, whereas the declines on the front-end of the curve are seen being “extra pronounced.”