NOB Spread Steepening Signals Structural Reset in Long-End Rates 

The widening of the NOB spread—the relative steepening of the 30-year yield over the 10-year yield—is one of the most important, yet often overlooked, bond market signals of the past several months, and understanding its drivers requires unpacking structural, policy, and technical forces. At around 60 basis points today, the 30y–10y slope has moved well above its long-term average of roughly 50 bps and far from the flat or inverted levels that dominated 2022–2023.  

This steepening has not been driven by a surge in inflation expectations, which remain anchored near 2.3–2.4% on 10-year breakevens, but by a meaningful rise in long-end real yields and a rebuilding of the term premium—the extra compensation investors demand for holding long-duration assets. 

Several forces are pushing the long end higher. The most important are fiscal supply and term premium. The U.S. is running persistent deficits, and Treasury issuance remains heavy. Although the most recent refunding held auction sizes for 10- and 30-year bonds steady, the absolute level of issuance is large, while the official-sector bid (from the Federal Reserve and foreign central banks) is shrinking. This forces the private sector to absorb duration, and investors demand higher yields to do so, particularly at the 30-year point.  

Second, Fed policy communication has reinforced caution: the July FOMC minutes showed that most members still see inflation risks as outweighing employment risks, and tariffs are expected to contribute to higher prices with lags. Even though the Fed held rates steady, its rhetoric leaves the market reluctant to price aggressive cuts, meaning investors require higher compensation further out the curve.  

Third, convexity hedging has amplified moves. When yields rise, mortgage-backed securities extend duration, prompting servicers and mortgage investors to sell duration (or pay fixed in swaps), which tends to weigh more heavily on the long end than the belly, mechanically steepening the curve.  

Finally, global demand dynamics matter: foreign official buyers, particularly from Asia, have been reducing Treasury purchases, while U.S. pensions and insurance companies have been more selective, all contributing to higher long-end yields. 

Financial need to view the shift through the lens of client portfolios. Long-duration exposures carry heightened volatility as the spread widens, and belly allocations in the five- to ten-year sector can provide income with less convexity risk. TIPS are also attractive at real yields above 2.6%, allowing liability-driven investors to lock in historically compelling real income. 

For commercial real estate investors, the widening NOB spread carries forward-looking consequences for valuations and financing. Many real estate valuations and cap-rate models implicitly benchmark to the Treasury curve. While CRE debt often prices off five- and ten-year swaps, higher long-end yields set the tone for the cost of long-term capital. A sustained bear steepening means higher cap rates over time, pressuring valuations, particularly for long-duration assets like office and multifamily.  

Public REIT markets tend to adjust first to higher yields, with private valuations catching up with a lag; this gap can be used as a leading indicator when underwriting deals. Refinancing risks are also higher: loans maturing into a steepened curve may face higher all-in coupons, tightening debt service coverage ratios and increasing default risk. Investors should stress-test portfolios assuming higher exit cap rates and less favorable refi terms and maintain liquidity buffers in case capital markets tighten. 

In short, the widening NOB spread reflects a structural reset in long-end rates driven by supply, term premium, and policy caution, rather than runaway inflation. Managers should also recognize the role of convexity hedging: volatility clusters around CPI releases, Treasury refundings, and major data points can accelerate steepening.  

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