Tariff fears and surging U.S. debt keep long-term Treasury yields on an upward path despite rate-cut expectations

11 August 2025

Traders work on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., August 6, 2025. REUTERS/Jeenah Moon/File Photo

A fresh Reuters poll of nearly 50 bond strategists spotlights a compelling tension shaping the U.S. economic landscape. While short-term Treasury yields those tied to two-year government debt have slipped roughly 25 basis points since mid‑July amid renewed bets on Federal Reserve rate cuts, expectations for longer-term yields paint a different picture. The 10-year yield is forecast to climb modestly to about 4.30 percent within three months before steadier trading around that level into early 2026.

This yield trajectory reflects a subtle recalibration of investor priorities. On one hand, expectations for rate cuts are gaining traction, fueled by softer labor data and political debates surrounding the Fed’s independence. Yet on the other hand, inflation risks especially those linked to a surge in tariffs and fears around escalating Treasury issuance are compelling bond buyers to demand higher compensation for longer-duration risk.

Collateral pressures are at play. Rising fears that higher tariffs will fuel inflation, combined with policy uncertainty and swelling federal borrowing, are all reinforcing the need for elevated long-term yields. The steepening yield curve where the gap between two-year and ten-year yields widens signals market expectations that short-term rates fall even as structural shifts push long-term rates higher.

BlackRock’s Jean Boivin weighed in on this dynamic, noting that while the Fed may favor easing, it could be constrained by inflation provinces that refuse to cooperate. Echoing that sentiment, Morgan Stanley acknowledged the lack of a credible path toward deficit reduction making elevated yields a necessary adjustment to attract sufficient buyers amid growing debt issuance.

This narrative unfolds against a backdrop of bond‑market anxiety. With the ratio of Treasury issuance rising and confidence in central bank autonomy shaken, the market appears fixated on ensuring higher returns on long-duration instruments. As strategists suggest, this is no longer a fleeting matter it must be factored into portfolios and policy planning alike.

While the short end of the curve reflects anticipation of easier monetary policy, the long end remains stubbornly lifted. It’s a dual narrative: near-term optimism tempered by long-term caution. The bond market is preparing for an era where inflation remains sticky and fiscal pressures intensify, even as the economy softens. In this complex balancing act, the long-term U.S. Treasury remains a barometer for both economic confidence and caution.