Long Treasury Yields to Stay Elevated as Inflation and Debt Pressures Persist

Summary:

Despite expectations of Federal Reserve rate cuts, long-term U.S. Treasury yields are likely to remain elevated due to persistent ..inflation, rising fiscal deficits

U.S. Treasury yields are expected to stay elevated in the long term as inflation remains stubbornly high and government debt continues to swell. While the Federal Reserve may implement rate cuts, particularly on short-term Treasury yields, the longer end of the yield curve is expected to resist downward pressure due to these ongoing challenges. A recent Reuters poll of 75 bond strategists revealed that despite potential Fed rate cuts, long-term yields are unlikely to see significant declines in the coming year.

Impact of Inflation and Fiscal Deficits

High inflation has been a persistent issue, remaining well above the Fed's 2% target, which has made it difficult for the central bank to ease policy substantially. The poll respondents noted that inflationary pressures, coupled with increasing deficits, are likely to keep long-term yields high. U.S. President Donald Trump’s aggressive tax and spending reforms are projected to add more than $3 trillion to the national debt over the next decade, further complicating the U.S. fiscal outlook.

While the Federal Reserve is expected to cut rates, analysts are cautious about the potential risks of easing too aggressively. Many believe that excessive rate cuts could reignite inflationary pressures, leading to a further increase in yields. The Fed’s ongoing struggles to manage the balance between curbing inflation and maintaining economic growth, especially amid a government shutdown that has halted key data releases, add to the uncertainty in economic policymaking.

Yield Curve Steepening

The forecast for U.S. Treasury yields suggests that the yield curve will steepen over the next year. The spread between the 10-year and 2-year Treasury yields is expected to widen from 50 basis points to 82 basis points by the end of 2025. This steepening reflects the continued resilience of the economy and the persistent inflation premium investors are demanding, as short-term rates are kept low while longer-term rates remain elevated due to inflation and fiscal concerns.

While expectations of rate cuts by the Federal Reserve may push short-term Treasury yields lower, long-term yields are likely to remain elevated due to persistent inflation, rising government debt, and economic uncertainty. These factors are expected to keep the yield curve steep, with investors demanding a higher risk premium for holding longer-term debt. As inflation and fiscal pressures continue, policymakers face a challenging balancing act in managing the U.S. economy’s stability and avoiding future economic missteps.

Source: Reuters

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