Is the Treasury sale over? Capital Economics weighs in on By Investing.com

Investing.com – While US Treasury yields are expected to decline over the rest of 2025, the yield curve could continue to rise, according to Capital Economics analysts.

Yields on the benchmark 10-year US government bond recently hit multi-month highs as investors fretted over the prospect of potential Federal Reserve interest rate cuts this year.

After cutting borrowing costs by a full percentage point in 2024, policymakers have signaled they will take a cautious approach to future drawdowns, especially as uncertainty hangs over the administration’s policies incoming President-elect Donald Trump. Economists have warned that Trump’s plans, particularly his threat to impose huge import tariffs on allies and adversaries, could put renewed upward pressure on inflation – and subsequently strengthen the case for the Fed to launch more rate cuts slowly, if at all.

But those concerns were somewhat calmed on Wednesday thanks to December’s reading of consumer price growth. The data showed that while U.S. consumer prices rose as expected in December, the underlying measure that strips out volatile items like food and fuel rose at a slower pace than the anticipated

Bets that the Fed will opt to launch a pair of rate cuts at the end of the year were boosted after the release of the figures on Wednesday, and remained in play despite other solid economic indicators later in the week.

Treasury yields, which tend to move inversely to prices, fell in response.

“Treasury yield selling has gone into reverse in the middle of this week,” Capital Economics analysts said in a note to clients on Friday.

But they noted that the trend was concentrated mainly along the yield curve. This led to a “significant” bend in the curve, the analysts said, adding that this “suggests to us that the short-term expectations for monetary policy – which in principle should directly affect bond yields at short term – they have a paradise. He hasn’t been in the driver’s seat lately.”

This so-called “bear steepening”, in which long-term yields increase by more than short-end ones, has left the bond market in a “bit of an unusual place” compared to previous Fed easing cycles.

They argued that the next moves in bonds could be determined by two key questions: What was causing long-term yields to rise so sharply in the first place, and how likely is it to resume?

One possible explanation could be rising Treasury premiums – the compensation investors need to bear the risk that interest rates may change over the life of a bond – as investors prepare for the potential volatility during the Trump administration, analysts said.

However, while they pointed out that much seems to depend on the progress of Trump’s policies in the next few years, “all the signs seem, to us, to point to slightly lower yields.”

Its forecast is for the end of 2025 at 4.50%, about 10 basis points below its current level, while the declines at the front end of the curve are seen to be “more pronounced”.