Citigroup Forecasts Steepening U.S. Treasury Yield Curve as Short-Term Rates Fall Faster

Citigroup strategists expect the U.S. Treasury yield curve to steepen, driven primarily by declining short-term interest rates as markets price in further Federal Reserve easing, according to a report cited by Odaily Planet Daily.Bull Steepening Scenario Takes ShapeCitigroup described the outlook as a “bull market steepening”, a scenario in which short-term yields decline more rapidly than long-term yields. This typically occurs when investors anticipate rate cuts and slowing economic momentum, while longer-dated yields remain supported by supply concerns and long-term growth expectations.“With the increasing risk of rising unemployment or a continued rebound in labor force participation, we are inclined to favor a bull steepening of the curve in 2026,” Citigroup’s interest rate strategists said in the report.Fed Rate Cuts Largely Priced InAccording to Citigroup, markets have already priced in expectations for additional Federal Reserve rate cuts in the second half of this year, which should help anchor yields in the middle of the curve — often referred to as the “belly.”This dynamic suggests:Short-term yields remain most sensitive to policy easingMid-curve yields stay relatively stableLong-term yields remain influenced by structural factors such as debt issuance and supply risksStrong Economy, Dovish Fed Support Further SteepeningDespite expectations for easing policy, Citigroup emphasized that the broader economic backdrop remains resilient. Combined with a dovish Federal Reserve and growing concerns about Treasury supply, strategists believe the yield curve has room to steepen further.“Amid a strong economic backdrop, coupled with a dovish Fed and growing concerns about supply, the yield curve should steepen further,” the report noted.Why the Yield Curve MattersA steepening yield curve often reflects:Expectations of lower policy ratesShifting growth and inflation dynamicsChanges in risk appetite across financial marketsFor investors, the trend could have implications across fixed income, equities, and risk assets, as falling short-term rates tend to ease financial conditions while long-term yields signal confidence in longer-term economic stability.As markets head into 2026, Citigroup’s outlook suggests that interest rate dynamics — not just rate levels — will play a key role in shaping global market performance.