U.S. Yield Curve Steepens as Markets Bet on Rate Cuts

The U.S. Treasury yield curve is steepening, driven by investor expectations of Federal Reserve interest rate cuts despite persistent inflation pressures. The gap between shorter- and longer-dated U.S. borrowing costs has widened, with the 30-year Treasury yield surpassing the 5-year yield by 1.08 percentage points, the largest spread since October 2021, according to Dow Jones Market Data. This shift reflects growing market confidence in monetary policy easing, even as inflation remains above the Fed’s target. The upcoming Jackson Hole symposium, where Fed Chair Jerome Powell is expected to speak, could provide critical insights into the Fed’s September rate decision, shaping global market sentiment.

Inflation concerns linger, with some Fed officials suggesting recent price pressures may stem from one-off tariff impacts. “The gap between shorter- and longer-dated U.S. borrowing costs is widening, reflecting investors’ conviction that the Federal Reserve will cut rates even as inflation looks set to quicken,” notes a Wall Street Journal report. Meanwhile, the U.S. labour market shows resilience, though budding signs of weakness have emerged. Investors are pricing in a 84% probability of a 25-basis-point rate cut in September, per LSEG data, with a two-in-three chance of a full percentage point cut by July 2026, according to CME Group’s FedWatch tool. Stable demand for U.S. Treasuries, with 10-year yields hovering around 4.25%, underscores market confidence despite these uncertainties.

U.S. tariff policies are influencing global bond markets, with Eurozone and U.K. yield curves also steepening. RBC Capital Markets analysts highlight that U.S. tariffs effective from August 7 have accelerated this trend, as investors demand higher yields for longer-dated bonds. In the Eurozone, 30-year Bund yields reached 3.34% on Friday, the highest since 2011, driven by fiscal concerns and Dutch pension reforms. In the U.K., gilt yields eased to 4.663% after hitting an 11-week high, with markets focused on upcoming inflation data that could sway Bank of England rate cut expectations. These global dynamics suggest broader market sensitivity to U.S. monetary and trade policies, with Germany’s upcoming auction of 2046- and 2054-dated Bunds likely to test investor appetite for long-dated bonds.