Fed Rate Pause and Fiscal Binge Fuel Treasury Yield Surge: Time to Short Duration?

The June nonfarm payrolls report's surprise strength and the $3.3 trillion spending bill's passage have reshaped the Treasury market's calculus. Investors now face a dual challenge: a Federal Reserve holding firm on rates despite White House pressure and a fiscal policy explosion that could permanently elevate long-term yields. Here's why positioning for sustained higher rates is critical.

The Jobs Report: Fed's Insurance Policy Loses Its Premium

The June report's 147,000 jobs beat estimates while unemployment dipped to 4.1%, a 17-month low. This resilience undermines the Fed's “wait-and-see” stance on rate cuts. shows markets now pricing just a 5% chance of a July cut, down from 24% pre-report. Fed Chair Powell's emphasis on “patience” and tariff-driven inflation risks suggests the central bank won't ease until 2026. With labor market slack near zero, the Fed's insurance policy against a slowdown is irrelevant—leaving short-term rates anchored near 4.5%.

The Fiscal Tsunami: $3.3T in Debt and Its Yield Implications

The Senate's “One Big Beautiful Bill” adds $3.3 trillion to the debt through 2034 via tax cuts and defense spending, offset by Medicaid/SNAP cuts. The Congressional Budget Office warns this will push deficits to $2.1 trillion annually by 2034—up from $1.1 trillion under current law. shows the debt-to-GDP ratio surging to 126% by 2034 from 99% today.

This fiscal recklessness has two yield impacts:
1. Supply Shock: The Treasury must issue $100 billion+ in new debt monthly to fund deficits. Rising supply without offsetting demand growth will push yields higher.
2. Inflation Anchoring: Tax cuts for high earners and defense spending could boost demand, while tariff-induced input costs keep inflation above the Fed's 2% target. The CBO's 2.1% 10-year inflation forecast is likely too optimistic given these headwinds.

The Yield Curve's Message: Long Rates Aren't Going Back Down

The 10-year Treasury yield has broken above 4.6%—a level last seen during the 2022 rate hike cycle. shows the curve steepening as markets price in persistent fiscal deficits. The spread between 10-year and 2-year notes has widened to 120bps, signaling investors expect higher long-term inflation and supply pressures. Unlike 2022, this isn't a temporary spike—the structural fiscal deficit is here to stay.

Investment Strategy: Shorten Duration, Hedge Inflation

• Short-Term Treasuries: The iShares 1-3 Year Treasury Bond ETF (SHY) offers safety with minimal duration risk. Its 4.3% yield is competitive with CDs and avoids long-end volatility.
• Inverse Bond ETFs: ProShares UltraShort 20+ Year Treasury (TBT) profits from rising yields. A 50bps yield increase could boost TBT by ~10%—though it's volatile.
• Inflation-Linked Bonds: The iShares Treasury Inflation-Protected Securities ETF (TIP) provides real returns as fiscal deficits and tariffs keep inflation elevated.

Conclusion: The Bond Bear Market Isn't Over

The Fed's pause and fiscal recklessness mean Treasury yields are in a new equilibrium. Short-term bonds offer stability, while inverse ETFs capitalize on the supply-demand imbalance. Investors clinging to long-dated Treasuries (TLT) are gambling against math—debt dynamics and inflation won't let yields retreat to 3% anytime soon.

The current steepness is a warning: long-term rates are pricing in a reality that won't reverse without a recession. Until then, duration is a risk—not a reward.

Positioning: Overweight short-term Treasuries (SHY), hedge with TBT, and hold TIP for inflation. The fiscal train wreck is already rolling—investors must brace for the fallout.