Treasury 5-Year Yield Drops 10 Basis Points to 3.86%

Treasury 5-Year Yield Drops 10 Basis Points to 3.86%

The 5-year Treasury yield dropped 10 basis points to 3.86% on June 19, 2025, marking a significant move in the bond market. This decline follows recent volatility and signals a shift in investor sentiment. The yield, which reflects the return investors expect from holding the bond to maturity, has been influenced by various factors, including inflation expectations, fiscal policy, and geopolitical tensions.

In early April, US Treasury bonds experienced a sharp reversal in yields, rising from around 3.86% to 4.5% in response to policy uncertainty and tariff escalations. However, the yield curve has since stabilized, with the 2-year note hovering near 3.9% and the 10-year note around 4.4% as of June 20, 2025 [1]. This range suggests that markets are pricing in modest growth and persistent inflation.

The recent drop in the 5-year yield can be attributed to several factors. Firstly, inflation has remained above the Fed's target of 3%, which has kept yields elevated. Secondly, rising fiscal deficits and increasing Treasury issuance have outpaced demand, pushing yields higher. Lastly, the Federal Reserve's ongoing quantitative tightening has removed a key demand source, further pressuring yields [1].

The Federal Reserve's benchmark rate remains at 4.25-4.50%, with the median projection still at two rate cuts by year-end, although there is a significant split in internal views. Some members, such as Christopher Waller, advocate for a July cut, while others, like Barkin and Daly, urge caution amid tariff and inflation risks [1]. The recent drop in the 5-year yield may suggest that markets expect economic growth to decelerate, but are not pricing in an outright recession.

The drop in the 5-year yield has significant implications for the economy and financial markets. Higher yields make borrowing more expensive for households and businesses, potentially dampening growth. However, if yields fall on cooling inflation, the Fed gains room to ease monetary policy. The next few months of inflation and trade data will be critical in determining the direction of yields and the Fed's rate policy.

In conclusion, the drop in the 5-year Treasury yield to 3.86% reflects a shift in investor sentiment and a response to recent economic developments. As the economy navigates through uncertain times, the bond market will continue to provide valuable insights into the state of the economy and the direction of monetary policy.

References:
[1] https://medium.com/@cv5capital/how-bond-prices-reveal-the-state-of-the-economy-e913f5f15fd1
[2] https://finance.yahoo.com/m/711065a3-faa8-3458-9412-97692b1d5cf3/bond-yields-slide-fed-s.html
[3] https://www.cnbc.com/2025/06/23/us-treasury-yields-us-bombs-iran-.html
[4] https://www.cbsnews.com/news/fed-meeting-today-fomc-interest-rate-decision-federal-reserve-june/