The Yield Curve Steepening Threat: Citigroup's Warning and Investment Implications

Citigroup Inc. has sounded a critical alarm over an impending risk to bond markets: the U.S. Treasury yield curve could steepen “aggressively” in 2025, driven by unsustainable fiscal policies and rising debt levels. This stark warning, issued by the bank’s strategists led by Dirk Willer, carries profound implications for investors, sectors, and the broader economy. Here’s what the analysis means—and how to position portfolios accordingly.

The Fiscal Tightrope: Why the Yield Curve Could Steepen Aggressively

Citigroup’s analysis hinges on a simple premise: U.S. fiscal policy is on an unsustainable path. The strategists project that by 2034, the federal budget deficit will average 6%–7% of GDP, with public debt rising to 118% of GDP—a level last seen during World War II. This grim outlook assumes an optimistic 3.8% nominal GDP growth rate, paired with $750 billion in spending cuts (partially offset by $260 billion in tariff revenue).

But the risks are clear. The strategists argue that these assumptions are overly rosy: economic growth could slow, cost-cutting may fall short, and tariff revenue from trade wars—like the 80% levy proposed on Chinese imports—might never materialize. The result? A surge in government debt issuance, pushing long-term yields higher relative to short-term rates.

Their core recommendation: short long-dated Treasuries using six-month forward contracts. The target? A widening of the 5-year/30-year yield spread from its current 40 basis points to 90 basis points, with the 10-year Treasury yield potentially rising by 20 basis points for every 1% increase in debt-to-GDP.

Winners and Losers in a Steepening Curve

The yield curve’s shape is a double-edged sword. For banks like Citigroup (C), a steeper curve is a tailwind. Their net interest margins (NIMs) expand as they borrow short-term (at lower rates) and lend long-term (at higher rates). Citigroup’s global corporate lending portfolio—44% of 2024 revenue from outside the U.S.—buffers it against trade tariff risks compared to peers like JPMorgan Chase (JPM) or Bank of America (BAC), which are more exposed to domestic markets.

Conversely, sectors reliant on cheap capital face headwinds. Utilities, precious metals, and REITs typically underperform when long-term rates rise. For example, Digital Realty Trust (DLR) and Realty Income (O)—both REITs—have historically underperformed in steep yield environments, as their capital-intensive models face rising borrowing costs.

Citigroup’s Positioning: Valuation Discounts and Strategic Resilience

Despite the risks, Citigroup’s shares offer a compelling entry point. As of early 2025, it traded at a price-to-book (P/B) ratio of 0.6 and a forward P/E of 8, both well below peers. Its 3.8% dividend yield—higher than Bank of America’s 2.9%—signals confidence in its balance sheet’s stability.

However, near-term risks remain. Citigroup’s Q1 2025 earnings, released on April 15, revealed a 3%–4% annual revenue growth forecast, supported by cost-saving measures. Yet, the bank’s allowance for credit losses (ACL) rose, reflecting concerns about borrower defaults amid trade tariff-driven economic uncertainty. Investors should monitor ACL adjustments closely, as a sharp increase could signal broader credit stress.

The Trade Policy Wild Card

The steepening yield curve isn’t just about fiscal math—it’s tied to geopolitical tensions. President Trump’s aggressive trade policies, including tariffs on China and negotiations over a Republican tax reform bill by July 4, add volatility. While tariffs may boost tariff revenues in the short term, they risk slowing global trade and consumer spending, potentially damping Citigroup’s corporate and retail lending segments.

Conclusion: Navigating the Steepening Curve

Citigroup’s warning paints a clear picture: fiscal excesses and trade wars could force a re-pricing of long-term rates, steepening the yield curve aggressively. For investors:
- Short long-dated Treasuries using forward contracts to capitalize on the spread widening.
- Buy Citigroup (C) on dips, leveraging its global diversification and undervalued metrics.
- Avoid sectors sensitive to rising rates, like utilities and REITs, unless yields stabilize.

The data is unequivocal: Citigroup’s call for a 90 basis point spread expansion by 2025 aligns with its own 3–4% revenue growth forecast and valuation discounts. While near-term risks like ACL hikes and trade tariffs loom, the bank’s scale and franchise position it as a prime beneficiary of the structural steepening. For now, the playbook is clear: bet on banks, hedge against long bonds, and brace for a rocky fiscal road ahead.