Steepest in Four Years: U.S. Treasury Market Continues to Digest Rate Cut Expectations

On June 25 (Wednesday), U.S. Treasury yields across various maturities posted slight declines as weaker housing data heightened expectations for interest rate cuts. The yield curve steepened to levels not seen in four years, indicating growing market anticipation of Federal Reserve easing.

Yields moved lower across the curve, with the 2-year yield falling by 4.02 basis points to 3.7786%, the 5-year yield declining by 1.59 basis points to 3.845%, the 10-year yield down by 0.59 basis points to 4.2906%, and the 30-year yield edging lower by 0.31 basis points to 4.8311%. The spread between the 30-year and 5-year Treasury yields approached 100 basis points, reaching its highest point since 2021. The difference between the 10-year and 2-year yields also widened to 51.2 basis points, a key indicator of economic sentiment.

While the curve has been steepening since early this year, recent movements represent a "bull steepening" pattern, where short-term yields fall faster than long-term yields—driven by increased bets on near-term rate cuts. This marks a departure from previous “bear steepening” episodes prompted by concerns over long-term bond supply.

Market speculation around a potential July rate cut intensified after Fed Governors Bowman and Waller, both appointed by former President Trump, began discussing this possibility last weekend. Citi’s U.S. rates strategist Ed Acton stated that their base case remains a first rate cut in September, while closely monitoring discussions ahead of the July FOMC and Jackson Hole meetings.
Wednesday’s U.S. housing data further fueled rate cut expectations. The U.S. Commerce Department reported that new home sales in May fell to an annualized rate of 623,000 units, a 13.7% monthly decline—well below the market's forecast of a 6.7% drop—and marked the largest decrease since June 2022.

According to the CME FedWatch Tool, traders currently assign a 25% probability to a rate cut in July and a 90% likelihood for September. Attention remains focused on further signs of economic weakening, with “hard data” now beginning to mirror earlier softness in “soft data.” Several Federal Reserve officials—including Richmond Fed President Thomas Barkin, Cleveland Fed President Beth Hammack, Fed Governor Michael Barr, and Minneapolis Fed President Neel Kashkari—are scheduled to speak on Thursday. Later in the day, the U.S. Department of Commerce will release the final Q1 GDP figure, and the Department of Labor will announce weekly jobless claims.

The most significant data, however, is expected on Friday, with the release of the May Personal Consumption Expenditures (PCE) Price Index. TD Securities' Gennadiy Goldberg noted that current market momentum is limited, and upcoming data could serve as a catalyst. Fort Washington Investment Advisors’ Dan Carter added that while short-term yields may fall, long-term yields could remain elevated, favoring a further steepening of the yield curve driven by either more aggressive Fed policy or increased fiscal concerns.