U.S. Treasury yields have fallen sharply across the curve, with the 2-year to 10-year maturities seeing the most pronounced moves in recent sessions. The declines come amid rising concerns over slowing economic growth and mounting recession risk, particularly following the July payrolls report, which showed just 73,000 jobs added and 258,000 in downward revisions to prior months. These figures have shifted bond market sentiment decisively toward expectations of imminent Federal Reserve rate cuts, reinforcing the rally in duration-sensitive fixed income.
Yield Curve Steepens as Market Prices in Fed Pivot
While short-term yields reflect renewed optimism about rate cuts, structurally higher term premiums and fiscal headwinds are anchoring the 10- and 30-year yields well above their pre-pandemic averages. As a result, the yield curve is likely to stay steep as the bond market continues to position for a Fed-friendly pivot amid stagflation uncertainty.
Technically, the 10-year yield’s break below its 200-day moving average of 4.38% confirms a further decline in yields as investors position toward a more dovish policy trajectory. The next major support lies at the psychological 4.00% level, with momentum suggesting potential for a test toward 3.85% if incoming economic reports continue to confirm disinflation and slowing demand. The MOVE Index, a measure of bond market volatility, has also eased to multi-year lows, highlighting a recalibration of rate expectations.
The direction of fixed income markets appears certain. Whether it be U.S. Treasuries, agencies, corporates, municipal bonds or preferred shares, the market is done wondering about what the next move is for interest rates. In fact, the U.S. 2-year Treasury yield now sits well below the Fed’s 4.33% median policy rate, a signal that markets are confidently pricing in 75 basis points of easing by year-end, according to the CME FedWatch Tool, with growing consensus that the Fed must act to prevent a deeper labor market deterioration.
San Francisco Fed President Mary Daly, in a recent interview with Reuters, explained: “I was willing to wait another cycle, but I can’t wait forever,” a reference to the Fed’s latest decision to leave rates unchanged.
“We of course could do fewer than two (rate cuts) if inflation picks up and spills over or if the labor market springs back,” Daly said. “I think the more likely thing is that we might have to do more than two… we also should be prepared in my judgment to do more if the labor market looks to be entering that period of weakness and we still haven’t seen spillovers to inflation.”
Bond ETFs Surge as Investors Position for Dovish Policy
This easing outlook is also reflected in flows into bond ETFs: the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which tracks the performance of intermediate-maturity (5–10 years), is up +6.3% YTD, and the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the largest U.S. investment-grade bond ETF by assets (over $30 billion AUM), is nearing a golden cross, a bullish technical indicator. LQD offers a current yield of 4.42% with an average duration of 8.6 years, positioning it as an attractive carry trade in an environment where markets expect up to 75 basis points of rate cuts by year-end.
Investor positioning is reflecting this bullish thesis. According to ETF flow data from BlackRock and Bloomberg, both funds have seen strong net inflows over the past 30 days, with VCIT pulling in over $1.2 billion and LQD adding nearly $900 million.
Lower Rates, But Not Without Friction
For CRE investors, the bond market’s pivot offers a more constructive interest rate environment heading into the second half of 2025. Lower long-term yields help compress cap rates, reduce debt service costs, and can improve the underwriting math for acquisitions and refinancing. Property sectors with stable income streams — such as multifamily, logistics, and essential retail — may benefit first, as their cash flows become more attractive on a relative basis.
However, the steep curve and higher term premiums on 10- and 30-year bonds suggest that long-dated financing will remain more expensive than pre-pandemic levels. This is particularly important for developers and value-add sponsors relying on construction loans or bridge-to-perm strategies. Moreover, markets are not uniformly easing: credit spreads for lower-quality borrowers remain wide, and lenders are cautious. This means core and core-plus assets financed by institutional capital may benefit most from falling rates, while transitional or distressed CRE faces continued hurdles.
Additionally, the potential for stagflation — with lingering inflationary pressures from tariffs or supply chain frictions — complicates the long-term picture. CRE investors must remain agile, focusing on assets with pricing power, strong lease structures, and tenants in resilient sectors. The upside: falling Treasury yields and reduced volatility may revive capital flows, lower the cost of capital, and unlock sidelined transactions in the latter half of the year.
Please share your comments below and click here for prior editions of “Treasury & Rates.”
#Bond #Market #Bets #Fed #Pivot #Treasury #Yields #Slip #Curve