U.S. Treasury yields have been whipsawed over the past two weeks, particularly at the long end of the curve, with the 30-year yield climbing to a cycle high of 5.14% on May 22 before retracing to 4.90% last Friday, then rising 10 basis points to 5.00% on Monday. The 10-year yield, meanwhile, rallied to 4.60% (though still well below its January high of 4.80%), retreated to 4.40%, and is trading at 4.42% today.
At the short end, with the Federal Reserve on hold and interest rate cuts now expected no earlier than the fourth quarter 2025 or the first quarter of 2026, it remains pinned to a tight range and likely has limited room to cheapen further. The persistent steepening of the U.S. yield curve shows little sign of reversing in the near future.
The U.S. 30-year yield has notably underperformed in 2025, standing out amid a rare curve divergence. While yields on U.S. 2-, 5-, and 10-year Treasury notes have declined, long-bond yields have pushed higher—a dynamic not observed over a full calendar year since 2001. The move reflects growing investor demand for higher compensation to hold long-duration U.S. government debt amid heightened fiscal and inflationary concerns.
The initial selloff was driven by concerns over U.S. fiscal expansion, tepid global demand for duration, Japan-led weakness in global long end yields, and a stronger-than-expected U.S. growth and labor outlook. The rebound was led by Japanese bonds following a Ministry of Finance survey signaling potential supply adjustments to long duration securities. CTA and macro fund flows have recently unwound shorts on long-duration, aiding the rally. However, systematic strategies remain neutral to short, and dealer positioning is light, reducing the risk of a large squeeze.
The inability of U.S. Treasury yields to hold above technical cycle-wide “cheap” levels has also triggered a wave of short covering and stellar $69 billion 2-year, $70 billion 5-year and $44 billion 7-year auctions last week, further supported the rally. While the long end remains vulnerable to volatility, risk assets have welcomed stabilization.
For the time being, barring any new reports about on again, off again tariffs, it appears duration can trade in a tighter range than witnessed in late April. At the front end, interest rates are likely to remain in a holding pattern until the release of the May nonfarm payroll report on Friday. Though June is likely off the table for an interest rate cut, a sustained deterioration in labor data—particularly a sub-50k payroll print or a rise in unemployment to 4.4%—could bring rate cuts back into the conversation later this year or early 2026.
A range between 4.75% and 5.00% for the U.S. 30-year yield and 4.25% to 4.50% for the U.S. 10-year yield seems fair for now. A durable rally would require meaningful fiscal discipline, regulatory changes, or Treasury buybacks. Conversely, a deficit-expanding budget could reignite pressure on the long end of the curve.
Looking ahead, easy funding conditions could tighten if the debt ceiling is lifted—potentially with a $4 trillion increase—which would drain reserves through increased supply of Treasury bills. Any increase in Treasury issuance, especially in bills, without offsetting reserve injections, could put further widening pressure on spreads. Swap spreads have remained wide (e.g., 10-year swap spread near +55 basis points), reflecting regulatory constraints (e.g., balance sheet costs) and the lack of meaningful U.S. Treasury buyback operations.
This could also push repo rates higher and raise the risk of cheapening in off-the-run Treasuries later in the year, especially if the Fed doesn’t inject additional liquidity. The Fed’s overnight reverse repo facility continues to soak up about $400 billion to $500 billion in excess reserves, providing cushion. However, as U.S. Treasury increases T-bill supply post-debt ceiling suspension, those reserves could drain.
If T-bill issuance ramps up by $500 billion to $700 billion without offsetting Fed balance sheet support, it could drain reserves from the banking system, tightening repo markets and raising funding rates. Repo rates are likely to tick higher within the Fed’s target band, especially in Q3/Q4. Any signs of Treasury liquidity stress could pressure spreads and exacerbate off-the-run dislocations.
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