Key takeaways
While 10-year Treasury yields fell in February reversing January’s upward trend, they’re still higher than they were as recently as September of last year.
After approaching 4.80% in January 2025, the 10-year Treasury yield fell to 4.25%.
Investors may wish to consider a wider range of fixed income vehicles in the current environment.
10-year Treasury yields fell from previous highs, falling by more than 0.50% in a matter of weeks. By the end of February, the 10-year Treasury yield slipped to 4.25%, still significantly higher than its mid-September 2024 level.1
“The market’s current yields are pricing in better economic growth, but we’re not seeing higher inflation expectations, which is often what triggers an interest rate upturn,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.
The recent interest rate decline occurred as the U.S. Department of the Treasury reached its borrowing limit. Treasury is waiting for Congress to suspend the debt ceiling limit so it can issue additional debt to cover government expenses. Since no new debt is being issued, the Treasury Department is pursuing “extraordinary measures” to maintain government operations. This includes spending down much of the $800 million the Treasury holds in general account funds. “This is likely contributing to the recent interest rate decline,” says Haworth. “The Treasury can’t issue debt due to the debt ceiling, and they are adding liquidity to the market, leading investors to put more money to work in Treasuries.” That creates a more favorable supply-demand balance, which drops bond yields.
In the coming weeks, Congress must address the debt ceiling issue. Once Congressional action again suspends the debt ceiling, new Treasury debt can be issued, boosting supply. “The effect could be to reverse the whole process, and the temporary circumstances helping bond yields decline would no longer exist,” says Haworth. However, other factors are likely to come into play.
While long-term yields declined, short-term rates remained relatively stable. This comes in the wake of the Federal Reserve’s (Fed’s) most recent interest rate stance. In 2022 and 2023, the Fed raised the federal funds target rate (the rate banks charge each other for overnight lending) by 5.0%. In late 2024, the Fed cut rates by 1.00%. However, the Fed has now curtailed plans for further rate cuts.2
In recent weeks, the 3-month Treasury yield held near 4.35%. In late February, the 10-year Treasury yield dropped to 4.25%. As a result, the yield curve again modestly inverted, but not as dramatically as was the case from late 2022 until late 2024. Today’s yield curve, the yield generated by Treasury bills from 3-month maturities to 30-year maturities, are virtually flat.
The new Trump administration and the Republican-led Congress have ambitious plans but also face notable challenges in dealing with government funding issues. Along with the debt ceiling limit, the fiscal 2025 federal budget (the fiscal year began October 1, 2024) has yet to be finalized. A continuing resolution that maintained the previous year’s funding levels expires on March 14, requiring Congressional action by then to avoid a partial federal government shutdown.
In the meantime, Trump and congressional allies are seeking to pass a major legislation that includes dramatic spending cuts while extending provisions of 2017’s Tax Cuts and Jobs Act. The 2017 bill expires at 2025’s conclusion. A major question is whether the new legislation will contribute more to the nation's federal debt. The risk exists given President Trump’s determination to extend tax cuts.
“Government debt levels are a growing bond market consideration,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Final Congressional action on tax and spending cuts and the ultimate impact on debt may affect Treasury yields going forward.”
“Government debt levels are a growing bond market consideration,” says Haworth. “Final Congressional action on tax and spending cuts and the ultimate impact on debt may affect Treasury yields going forward.”
How should investors approach fixed income markets today? Investors may wish to modestly underweight their fixed income position within portfolios that mix stocks, bonds and real assets. “This isn’t specifically an indication of bond market weakness but reflects our expectations that economic conditions should support continued earnings growth, creating more attractive forward opportunities in equities,” says Haworth.
Nevertheless, Haworth says that within their bond portfolios, investors should explore the potential of more complex credits. For example, investors in high tax brackets may benefit by extending durations slightly longer and including an allocation to high-yield municipal bonds as a way to supplement their investment grade municipal bond portfolio. Some non-taxable investors should consider diversifying into structured credits, non-government agency issued residential mortgage-backed securities, commercial mortgage-backed securities and collateralized loan obligations. “These types out-of-the-mainstream credits all offer solid fundamentals and an opportunity to pick up extra yield,” says Haworth. For certain eligible investors, insurance-linked securities may offer a way to capture differentiated cash flow with low correlation to other portfolio factors.
Talk to your wealth professional for more information about how to position your fixed income investments as part of a diversified portfolio.
As interest rates change, learn what the ripple effects across capital markets may mean for investors.
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
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