U.S. Treasury Yield Curve Nears Steepest Level in Over Four Years Amid Rate Cut Speculation

The U.S. Treasury yield curve is approaching its steepest level in over four years due to interest rate cuts and concerns over persistent inflation and fiscal deficits. According to Jin10, the additional yield on 10-year Treasury notes compared to 2-year notes expanded to as much as 73.7 basis points on Thursday, slightly below the peak of 73.8 basis points reached in April, which was the highest since January 2022. The widening of the spread on Thursday was driven by signs of a weakening U.S. labor market, prompting traders to increase bets on the Federal Reserve easing monetary policy this year. Overnight index swaps indicate that the Federal Reserve is expected to lower its benchmark rate by June, just a month after the end of its term, with a total of two to three 25 basis point rate cuts anticipated this year. Investors are speculating that Kevin Warsh, nominated by U.S. President Donald Trump as the Federal Reserve Chair, may favor lower interest rates despite his hawkish reputation. Martin Whetton, Head of Financial Markets Strategy at Westpac, noted, "Although the curve has seen a considerable parallel shift, weak employment data poses more downside risk to front-end yields. However, comments from the U.S. Treasury Borrowing Advisory Committee earlier this week suggested that the timing of increased supply might be earlier than the expected November, making the curve steeper."