Yield volatility reflects a multitude of factors

US Treasurys have been a busy economic barometer as of late. In April, the extraordinarily high “reciprocal” tariffs and threats by President Trump to remove Federal Reserve Chair Powell created a sell US assets moment, resulting in large and rapid swings in Treasury yields, the dollar, and stock prices. Then in May, the Trump administration push to enact the “One Big Beautiful Bill”—which would keep deficits elevated in coming years—advanced through the House of Representatives, contributing to rising long-term yields in the US Treasury and in other developed country sovereign bond markets. In conjunction with these events, the short-term market expectation of Fed policy easing through the end of 2025 fluctuated in a wide range of 50-100 basis points, settling in currently at about 50. 

The net effect of all the tumult is that the average yield on the US Treasury index is about 20 basis points higher than where it stood on April 1, the day before “Liberation Day.”  The direction of the next big move is inherently uncertain as bond market sentiment and macroeconomic expectations can turn on a dime or on a “Truth Social” post these days. 

What’s next for Treasury yields? 

US budget deliberations are not yet finished. The Senate could end up cutting more spending from the bill, as a few Republican hawks are not happy with the level of spending cuts embraced by the House. The bond market would welcome any additional fiscal restraint added to the bill. Conversely, should Senate moderates push in the opposite direction to water down Medicaid cuts, the opposite net effect could occur, and Treasury yields may rise somewhat. 

The Fed remains in wait-and-see mode, with inflation biased higher on tariff increases. That effect may ultimately prove temporary and the Fed could be forced to look through inflation concerns in response to any meaningful weakness in employment. With US growth likely to slow in the near term and the most extreme tariff policies unlikely to be enacted, Fed easing this year remains more likely than not.

In our view, the market is priced for a more modest amount of Fed easing, US and global economies are apt to slow due to the tariff tumult, President Trump has moderated his most aggressive tariff tactics, and Treasury market yields sit higher now following an eventful two months. Thus, it seems reasonable to conclude that Treasury yields may find a smoother, though gradual, downward path from here that could serve bond investors well in the near-term.