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The long end and the belly of the U.S. Treasury yield curve still carry the risk of fiscal profligacy, which leaves the curve exposed to steepening even as the front end has reason to stay bid. The Democratic sweep of the House and the Senate barely changed that picture, and the Treasury curve's reaction to the result was very muted. For bond investors, the fiscal risk in longer maturities matters more than the election outcome itself.
Shriya Samarth, StoneX Head of Rates, EMEA, covers U.S. and European sovereign debt, gilt markets, yield curve dynamics and central bank expectations. That coverage gives insight into what is driving the U.S. Treasury yield curve, from fiscal risk in the long end to safe-haven demand for government bonds.
Fiscal risk in the long end and the belly of the U.S. Treasury yield curve gives the curve room to steepen, and the Democratic sweep of Congress has not removed it. The Treasury curve moved far less than expected after the midterm results, with a very muted reaction overnight. Investors holding longer-dated Treasuries therefore remain exposed to fiscal concerns in the 20-year and 30-year sector rather than to the shift in political control. According to Samarth, "the midterms haven't really changed much about the risks already at play."
"Lately, U.S. treasuries and European government bonds, alongside U.K. gilts, have been a safe haven bid against the volatility in the equity market off of some weak AI earnings," Samarth says. The front end of the U.S. Treasury yield curve has reason to remain bid as that demand for safety persists. Conversely, the long end still has to absorb the risk of fiscal profligacy, so the two ends of the curve are being pulled by different forces. Treasury Secretary Scott Bessent previously tried to twist flatten the curve by reducing long-end issuance in favor of short-dated bills. With lower Treasury yields and natural demand so far, the need for that support going into year-end is now in question.
The U.S. Treasury quarterly refunding announcement is the clearest signal of the pressure on the 20-year and 30-year sector of the yield curve. Changes to long-end issuance show how far the Treasury is leaning on short-dated bills, the approach Bessent used to twist flatten the curve. The curve's response to political events is a second signal, evidenced by the muted move after the midterms. Together, these show how much of the fiscal risk in the long end the market is absorbing.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Shriya Samarth, StoneX Head of Rates, EMEA
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Fiscal risk in the long end and the belly keeps the U.S. Treasury yield curve exposed to steepening, even after the midterms. Safe-haven demand supports the front end while the refunding announcement puts the 20-year and 30-year sector in focus.
Fiscal risk in the long end and the belly keeps the U.S. Treasury yield curve exposed to steepening, even after the midterms. Safe-haven demand supports the front end while the refunding announcement puts the 20-year and 30-year sector in focus.
U.S. 10-year Treasury yields are holding at a key support level that sits between a broad risk-on reversal and a deeper risk-off move. Inflation concerns and Federal Reserve rate hike expectations keep yields supported, and that support keeps a lid on risk appetite across markets.
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