Damo gives a reference script for 2025-26 US Treasury yields: Short-term yields fall sharply and long-term bonds support the peak of the curve

The Zhitong Finance App learned that a team of analysts from Wall Street financial giant Morgan Stanley predicted that the US Treasury yield curve would clearly steep in 2025-2026, but emphasized that it was not due to a sharp rise in long-term yields, but to the overall downward trend in yield, especially the sharp decline in short-term US bond yield curves. The yield curve for long-term US bonds may continue to be high near historic highs this year due to the heavy pressure on the US government budget deficit that continues to heat up. Starting at the end of the year, it will decline slightly due to economic weakness. The so-called “term premium” may soar before the end of the year, and global equity bonds will also face heavy downward pressure during this period.

Despite the steeper forecast, the agency's analysts still remind investors who focus on long-term US bonds. Driven by expectations of the US government's budget deficit expansion, the financial market background where the high yield of long-term US bonds (10 years and above) continues to put huge selling pressure on investors in the equity market in the coming months. In comparison, short-term US bond yields this year and even early next year may be on a clear downward trajectory. This means that Damo expects the price of short-term US bonds to rise significantly stronger than long-term US bonds, driving a steep trend in the overall US bond yield curve.

Macroeconomic analysts from Damascus also expect that inflationary pressure related to the tariff policy led by Trump since April will prevent the Federal Reserve from cutting interest rates in 2025, that is, they expect the Federal Reserve to choose “not to cut interest rates” this year. Damo said that the hawkish policy expectation that the Federal Reserve will not cut interest rates may be priced by the market, so it is likely that the US bond yield curve, especially the long-term US bond yield, will stay within the range formed in the last two years much longer than investors expected.

In contrast, the “CME Federal Reserve Watch Tool” shows that traders in the interest rate futures market are still betting that the Federal Reserve will cut interest rates for the first time this year in September, and that the next rate cut will be in December. The Goldman Sachs economist team believes that the Federal Reserve is still expected to normalize monetary policy and cut interest rates after the negative effects related to tariffs subside and temporary inflationary shocks are significantly mitigated. Goldman Sachs expects the peak inflationary effect of tariffs to be shown in the May-August inflation report, and initially predicts that the Federal Reserve will cut interest rates for the first time this year in December.

Damo's yield is expected to decline starting at the end of the year, and the entire curve is gradually moving towards a steep trajectory

However, looking ahead to the end of the year to the beginning of next year, the Dama analyst team predicts that as inflation slows significantly around the end of this year, the US economic growth rate and labor market will also weaken due to tariffs and immigration restrictions compounded by the Federal Reserve's long-term high interest rates. This slowdown is expected to significantly shift the overall yield curve downward, and the 10-year US Treasury yield is expected to fall near the important mark of about 4% by the end of the year.

Entering the first half of 2026, the Dama analysis team assumes that the yield will show a more obvious downward trajectory. As the US economic situation continues to weaken, the yield curve will become steeper, and the yield decline on short-term US bonds may be even greater, which means that Damo expects short-term US bonds to continue to outperform the price of long-term US bonds, and eventually bring the steeper upward curve of the overall US bond yield curve to the overall level seen in the past two years.

By the close of the US stock market on Monday, the 10-year US Treasury yield was around 4.5%, and the yield on the short-term 2-year US Treasury was hovering around 4.03%. The longest term is also currently the least popular long-term US bond in the market — the 30-year US Treasury yield is about 4.93%, which is very close to 5%.

In anticipation of the deficit expansion, long-term US bond yields may remain high for a long time

According to the Dama analyst team's “US Treasury Yield Curve Trajectory” scenario, short-term US bond yields will enter a continuous downward trajectory, while long-term US bonds will continue to hold the peak of the curve until the end of the year. This means that Damo expects the price increase of short-term US bonds to be stronger than long-term US bonds until the end of the year, while the yield on long-term US bonds may continue to rise high or even occasionally soar due to heavy pressure from the expansion of budget deficits, which in turn may drive the “term premium” to hover to the highest level since 2014 or even 2013, causing another sharp shock in the global equity market.

In recent weeks, global long-term sovereign bond yields have soared; investors are generally worried about growing US debt and deficits. Some have chosen to avoid such long-term securities, and some investment giants focusing on bond assets are demanding higher “term premiums” due to concerns about risk.

The 10-year US Treasury maturity premium, which measures investors' concerns about the size of Washington's huge future loans, is now hovering at its highest level since 2014.

The so-called term premium refers to the additional yield compensation required by investors to hold the risk of long-term bonds. Looking ahead to the next few years, the imposition of tariffs on foreign countries may even become a common consensus in the Western world. Therefore, in the increasingly divisive “anti-globalization” era, fiscal spending dominated by domestic policies such as interest on US debt, military industry and defense, and the Trump administration's tax cuts embarked on a path of significant expansion. Market concerns about the US government's growing debt sustainability and long-term inflation risk are heating up dramatically. The “term premium” that discourages the financial market. The 10-year US bond yield, which is the “anchor of global asset pricing,” is even preparing for a comeback. The wave surged to more than 5% compared to 2023 More wild gains.

According to some economists, the issuance of treasury bonds and budget deficits in the “Trump 2.0 era” after returning to the White House will be much higher than the official forecast. Mainly due to the new Trump administration's economic growth promotion and protectionist framework centered on “internal tax cuts+external tariffs”, compounding the increasingly huge budget deficit and interest on US bonds, the scale of US Treasury debt issuance may be forced to expand more and more in the “Trump 2.0 era”. In addition, under “anti-globalization,” China and Japan may drastically reduce the price of US “maturing bonds”” It is bound to be more advanced than before.

A higher “term premium” means higher yields, which may cause the stock and bond market to continue to fall into a downward trajectory. At the same time, it also means that financing pressure is increasing at a time when demand for US borrowing is rising and government spending is still strong. The Trump-led version of the fiscal and tax relief bill passed by the House of Representatives is predicted by some agencies to increase the US budget deficit by trillions of dollars over the next few years. Moody's Ratings downgraded the US credit rating last month, causing the US government to lose the top sovereign credit ratings of the three major rating agencies.

The fixed income strategy team from Charles Schwab (Charles Schwab) is basically in agreement with Damo. “Overall, a steeper yield curve is the most likely prospect,” said the team led by Kathy Jones, chief fixed income strategist from Schwab Wealth Management. “If the data is weak enough and the Federal Reserve announces interest rate cuts, short-term yields will be drastically lowered, but long-term US bond yields will still be hampered by expectations of worsening budget deficits, high debt interest, long-term weakening of the US dollar, and capital inflow concerns.”