Long-dated Treasurys are falling out of favor fast. Since April 2, the 10-year yield jumped to 4.37% as bond prices dropped, even though shorter-term yields went the other way.
That divide—what Wall Street calls a steepening twist—came as markets were still reacting to President Donald Trump’s tariff moves, which triggered chaos earlier in April.
This twist has already started raising borrowing costs across the economy. The Federal Reserve may plan to cut rates to boost growth, but long-term yields don’t seem to care anymore.
They’ve disconnected from the usual relationship with short-term rate expectations. That’s a major red flag for policymakers trying to keep credit flowing.
Longer-term yields rise as term premium climbs
One of the key reasons for the spike in long-dated Treasurys is fear—mostly about inflation and policy direction. Trump’s unpredictable trade policies have clouded investor expectations. While many think inflation will cool down in the coming years, they’re not betting on it with full confidence.
To protect themselves, they want a higher return for holding long-term debt. That extra return is called a term premium, and it’s been on the rise.
“The bond market is reflecting uncertainty about where this economy is heading and still lingering uncertainty about what the policy landscape will ultimately be,” said Tim Ng, a fixed-income portfolio manager at Capital Group.
Another concern is the federal budget deficit. Investors are worried the government will keep pumping out more bonds to cover its shortfall, which will keep dragging down prices. Republicans in both chambers have been trying to push tax-cut bills, but there’s no clear plan for spending cuts to balance it out. That makes investors even more cautious.
Even if the U.S. hits a recession and the Fed slashes rates, there’s concern that long-term yields might stay stubborn. That would screw over mortgage borrowers and anyone trying to take out large loans. The average 30-year mortgage rate last week hit 6.8%, up from last month, Freddie Mac reported.
Term premium isn’t easy to calculate, but most models say it’s been trending up since 2021 when inflation returned after years of absence. It rose again after Trump got re-elected in November.
Investors expected his policies to fuel higher deficits and inflation. Then his tariff announcement caused a broad market selloff, including in Treasurys. The administration later eased up on some trade policies, and yields fell slightly, but term premium is still elevated.
Goldman Sachs analysts said in a report that it’ll be hard “to undo the reset in term premia,” adding that the “underlying macro uncertainty…likely won’t simply resolve with shifts in rhetoric.”
Some argue the economy can survive higher term premiums—it did in the 80s and 90s—but others say the Fed is flying blind. Jerome Powell, the Fed Chair, said last week the central bank isn’t in a hurry to cut rates. He said the economy’s still holding up but warned inflation risks haven’t gone away.
“They’re really trying to establish their inflation-fighting credibility and keep that credibility,” said Chris Brown, who runs securitized products at T. Rowe Price.
The Treasury Department has started reacting. In 2023, officials began raising the size of long-term bond auctions to cover more borrowing. But when yields surged, they slowed those increases to calm things down.
During his campaign, Scott Bessent—now Treasury Secretary—blasted the department for not issuing enough long-term debt. But since taking office, he’s changed course. He’s now saying he has no plans to tweak auction sizes in the near future.
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