Stable intake rates persist.
The US Treasury bond curve is continuing to flatten aggressively, as market participants grapple with a combination of monetary policy expectations, structural fiscal and demographic challenges, and changing market dynamics.
Despite relatively strong US economic data and robust growth dynamics, there were few truly new developments in the news. Central bankers are more concerned about the US economy overheating in the wake of the pandemic's recovery than it suddenly cooling down.
The decline in yields on US Treasury Bonds and the shift in market sentiment towards secular stagnation are driven by several key factors.
First, the Federal Reserve's policy anticipation plays a significant role. Market expectations that the Fed will begin cutting interest rates later in 2025 are leading to a cooling effect on short-term yields, pushing 2-year Treasury yields lower by the end of the year. This contributes to a steepening yield curve with longer-term yields relatively higher but also mildly declining.
Second, rising US debt and fiscal concerns put upward pressure on yields due to the risk of debt accumulation. However, the large refinancing needs (nearly $8.9 trillion maturing between 2025-2027) also create uncertainty that dampens demand for Treasuries, resulting in volatile and somewhat lower yields amid risk aversion.
Third, demographic shifts are another structural issue constraining economic growth. The declining worker-to-retiree ratio increases entitlement spending, shrinks the tax base, and reduces domestic savings—all factors contributing to secular stagnation expectations.
Fourth, the decline in foreign investment in Treasuries is decreasing demand for US debt, despite attractive yields. Combined with long-standing yield curve inversion and technical sell-offs from algorithmic trading, this worsens market sentiment.
Lastly, Moody’s downgrade of US government credit from AAA to Aa1 in mid-2025 increased yields temporarily due to higher risk premiums but also elevated market volatility. This reflects growing concerns about the sustainability of fiscal policy and slows confidence in Treasuries.
Together, these dynamics reflect a market grappling with constrained economic growth prospects, persistent fiscal deficits, and demographic headwinds, which align with the concept of secular stagnation—a prolonged period of low growth and low interest rates driven by structural factors rather than just cyclical fluctuations.
However, the narrative of a "Japanification" anchoring the natural interest rate permanently at 0% is unlikely and needs critical examination. Real interest rates are currently lower than they were in the same period last year, and Treasury yields have given back more than half of their gains from the first quarter of 2021.
Accommodative fiscal and monetary policy continues to fuel the economic recovery, but persistent uncertainties surrounding Covid-19 and the Delta variant could have been influencing factors in the recent market movements.
[1] Fed Rate Cuts Anticipation Drives US Treasury Yields Down [2] Structural Fiscal and Demographic Challenges Impact US Treasury Yields [3] Foreign Investment Decline and Market Technicalities Affect US Treasury Yields
The Fed rate cuts anticipation drives US Treasury yields down, as market participants expect the Federal Reserve to begin cutting interest rates later in 2025.Structural fiscal and demographic challenges impact US Treasury yields, as rising US debt, declining worker-to-retiree ratio, and decreasing foreign investment in Treasuries contribute to secular stagnation expectations.
