U.S. Treasury Yield Curve Steepens as Rate Cut Expectations Rise

The U.S. Treasury market experienced a mixed session on Tuesday, with short-term bonds rising and long-term bonds falling. The July Consumer Price Index (CPI) report, released earlier in the day, did not deter expectations for a rate cut by the Federal Reserve in September. This led to a steepening of the U.S. Treasury yield curve, as European long-term bonds faced significant selling pressure.

Shortly after 3 PM New York time, short-term Treasury yields fell by 3-4 basis points, while long-term yields rose by 2-3 basis points. The 7-year yield remained relatively unchanged. The 2s10s and 5s30s yield curves steepened by 4-5 basis points.

The 10-year U.S. Treasury yield hovered around 4.29%, rising less than 1 basis point for the day. This performance was better than that of German and British bonds of the same maturity. German and British 30-year bond yields closed up 7-8 basis points, with the German yield reaching its highest level since 2011.

The movement in U.S. Treasury prices was primarily driven by the morning session, following the release of the July CPI data, which was largely in line with expectations. The Overnight Index Swap (OIS) contracts for the Federal Reserve's meeting in September indicated a nearly 90% probability of a 25 basis point rate cut, supporting the short end of the curve.

In the SOFR options market, there was a resurgence in trading that reflected a dovish shift in market expectations. This included a revival in demand for the 2025 September call spread strategy, which would benefit from a 50 basis point rate cut at the September meeting.

The shift in rate cut expectations boosted U.S. equities but put pressure on long-term U.S. Treasuries. By 3:05 PM Eastern Time, the 2-year Treasury yield was at 3.7287%, the 5-year yield was at 3.8207%, the 10-year yield was at 4.2907%, and the 30-year yield was at 4.8827%. The 2s10s yield spread was 55.988 basis points, and the 5s30s yield spread was 106.022 basis points.

The July CPI report, which showed inflation largely in line with expectations, reinforced market expectations for a rate cut by the Federal Reserve in September. This expectation was reflected in the OIS contracts, which indicated a nearly 90% probability of a 25 basis point rate cut. The dovish shift in market expectations was also evident in the SOFR options market, where there was a resurgence in demand for strategies that would benefit from a rate cut.

The steepening of the U.S. Treasury yield curve, with short-term yields falling and long-term yields rising, reflected the market's expectation of a rate cut in the near term. This expectation was supported by the July CPI report, which showed inflation largely in line with expectations, and the OIS contracts, which indicated a nearly 90% probability of a 25 basis point rate cut in September.

The shift in rate cut expectations had a significant impact on the U.S. Treasury market, with short-term bonds rising and long-term bonds falling. This was reflected in the steepening of the 2s10s and 5s30s yield curves, which widened by 4-5 basis points. The movement in U.S. Treasury prices was primarily driven by the morning session, following the release of the July CPI data, which was largely in line with expectations.

The dovish shift in market expectations was also evident in the SOFR options market, where there was a resurgence in demand for strategies that would benefit from a rate cut. This included a revival in demand for the 2025 September call spread strategy, which would benefit from a 50 basis point rate cut at the September meeting. The shift in rate cut expectations boosted U.S. equities but put pressure on long-term U.S. Treasuries.