Rising Yields, Falling Fortunes: Why Shorting Treasuries Is the Prudent Play Now

The U.S. Treasury market is at a crossroads. After years of historically low rates, the 10-Year Treasury yield has surged to 4.45%—its highest level in months—amid a Federal Reserve that remains resolute in its fight against inflation. Yet, the yield curve’s inversion, a reliable recession signal, persists, and investors face a stark choice: adapt to the new reality or risk being left behind. The writing is on the wall: shorting Treasuries is no longer optional—it’s essential.

The Fed’s Firm Hand: Rate Projections Signal No Letup

The Federal Reserve’s May 2025 policy statement underscores a pivotal shift. While the Fed held rates steady at 4.25%–4.5%, its projections reveal a relentless focus on price stability. Inflation is projected to decline gradually to 2% by 2027, but the Fed’s median forecast for the federal funds rate—3.9% in 2025—hints at a prolonged period of elevated borrowing costs.

This stance isn’t just about today’s economy. The Fed’s “wait-and-see” approach masks a deeper truth: rising yields are here to stay. With inflation proving more resilient than anticipated—core PCE inflation remains stubbornly above 2.7%—the Fed’s path to easing is fraught with uncertainty.

The Inverted Yield Curve: A Recession’s Echo

The yield curve, once a reliable barometer, is now screaming warnings. The 10-Year-3 Month Treasury yield spread, a critical recession indicator, has oscillated near zero for months, flirting with inversion. Historically, this spread’s negative territory has preceded every U.S. recession since 1970, with an average lead time of 11 months.

While the May 2025 spread briefly turned positive to 0.03%, the fragility of this recovery underscores the risks. The Fed’s own data shows that over 80% of participants see inflation risks skewed to the upside—a stark reminder that short-term rates could outpace long-term yields for longer.

Why Shorting Treasuries Is the Prudent Move

The math is clear: long Treasury bonds are a losing bet. Consider the iShares 20+ Year Treasury Bond ETF (TLT), which has shed nearly 10% in value since late 2023 as yields climbed. Shorting TLT—or its inverse counterpart, the ProShares UltraShort 20+ Year Treasury ETF (TBT)—offers a direct play on rising yields.

Alternatively, investors can pivot to cash or short-term Treasury bills (e.g., the iShares Short Treasury Bond ETF, SHY), which offer stability amid a flattening curve. The 3-Month Treasury yield at 4.35% provides a risk-free return that outpaces many corporate bonds—a rare opportunity in this cycle.

The Historical Precedent: Act Now or Pay Later

History favors decisive action. In 2006, the last time the yield curve inverted, investors who shorted Treasuries rode a 20% decline in long-dated bonds over the next 18 months. Today’s parallels are striking: a Fed clinging to rates, inflation defying forecasts, and a market pricing in a recession by late 2025.

Conclusion: The Time to Rotate Is Now

The Treasury market’s crossroads is no longer a distant threat—it’s here. With yields rising, inflation resilient, and the yield curve inverted, investors must act. Shorting Treasuries via inverse ETFs or shifting to cash isn’t just a hedge—it’s a strategic reallocation to protect capital and profit from the Fed’s next move.

The question isn’t whether yields will keep climbing. The question is: Will you be on the right side of this historic shift?

Ruth Simon’s analysis combines decades of market expertise with a laser focus on actionable insights. Follow her for more on the Fed’s next moves and Treasury market dynamics.