The U.S. Treasury yield curve has shifted downward at the short end of the curve, with 2-year and 5-year Treasury notes dropping roughly 75 basis points this year. This drop was in anticipation of the resumption of Federal Reserve rate cuts, the first of which occurred on Sept. 17.
With investors expecting an additional two rate reductions this year, we anticipate that the front end of the curve may ease further while longer-term rates will remain near current levels or climb back toward 5% in the case of the 30-year Treasury.
Should that shift occur, investors’ angst over the duration of the business cycle may increase as the relief at the front end of the curve benefits those in new finance who can take advantage of low rates, liquidity and leverage in contrast with American households who will face higher costs on their loans and expenses.
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In the middle of the curve, 10-year bond yields dropped by 50 basis points from 4.63% to 4.13% this year through Sept. 23, while the 30-year bond dropped 6 basis points.
The more subdued drop in the 10-year Treasury is most likely a result of investors’ requiring compensation for the uncertainty over tariffs and their impact on inflation and growth.
The rather small drop in the 30-year bond reflects concern over the long-term impact of the government’s growing debt.
