The U.S. Treasury yield curve has adjusted the steepest in four years, and the expectation of rate cuts has driven the bond market to diverge

The U.S. Treasury market is experiencing the steepest yield curve adjustment in four years. On June 25, the yields of U.S. Treasury bonds of all maturities fell across the board, with the 2-year Treasury yield falling 4.02 basis points to 3.7786%, the 10-year Treasury yield falling 0.59 basis points to 4.2906%, and the 30-year Treasury yield falling 0.31 basis points to 4.8311%. While the market continues to digest the expectation of rate cuts, the Federal Reserve faces a complex policy choice dilemma.

Expectations of rate cuts drive the bond market to diverge

The dovish signals recently released by Federal Reserve officials have become a key factor in driving the bond market up. Board member Waller and Vice Chairman Bowman, who is responsible for regulatory affairs, have successively expressed their support for a rate cut as early as July. Interest rate swap contracts show that the Fed's cumulative easing is expected to be 60 basis points in the remaining four meetings this year, an increase of 15 basis points from a week ago.

Options market data show that traders are increasing their bets on the 10-year Treasury yield falling to 4%. The US 10-year Treasury options expiring in August attracted at least $38 million in premiums, and these positions are aimed at hedging the risk of yields falling from the current approximately 4.3% to 4%. If this expectation is fulfilled, it will reduce the yield to the lowest point since April 2.

There is a clear adjustment in the term structure within the bond market. The yield of active 20-year Treasury bonds has fallen by 5.5 basis points in the past week, and the 50-year bond has fallen by 4.65 basis points, which is a larger decline than other maturities. Against the backdrop of 10-year and 30-year bonds falling into volatility, the performance of ultra-long bonds has attracted market attention. These term varieties have higher coupon income and capital gains potential, becoming a new focus of institutional allocation.

Weak economic data strengthens expectations of easing

Volatility in US economic indicators provides support for expectations of rate cuts. The consumer confidence index unexpectedly fell 5.4 points to 93 in June, lower than economists expected. Consumers continue to be anxious about the economic impact of the increase in import tariffs and are more cautious about spending. The proportion of consumers who expect interest rates to rise in the next year rose to 57%, the highest level since October 2023.

The job market showed signs of weakness. ADP data showed that private sector employment growth was the weakest in two years, and the ISM service index unexpectedly declined. The industry shrank for the first time since June last year. Retail sales fell 0.9% month-on-month in May, lower than market expectations, although core retail sales growth of 0.4% was still higher than expected.

The Federal Reserve Beige Book showed that US economic activity has declined slightly in recent weeks, and tariffs and high uncertainty are taking a toll on the economy. Most regions described employment as "flat", and generally mentioned that hiring was delayed due to uncertainty. All regions pointed out that labor demand was weakening and wages were growing at a "modest" pace.

US debt pressure continues to intensify. Interest expenses in fiscal 2024 will exceed $1.13 trillion, exceeding the total of military spending and health insurance for the first time. The amount of new national debt in the first four months of this year is equivalent to Brazil's annual GDP. The yield on 30-year US Treasury bonds once reached a high of 5.05%, setting a new record since 2023. The Ministry of Finance is facing huge financing pressure. The refinancing scale in the first quarter of 2025 remained high. The national debt auction was not good, and the bid multiple fell to the freezing point.