US Long-Term Treasury Yields Reach Two-Week High Amid Strong Economic Data; Fed Likely to Maintain Rates

U.S. long-term Treasury yields reached a two-week high on Tuesday, with the 30-year bond yield rising to 4.87% amid strong economic data. This increase reflects investor expectations of continued Federal Reserve rate stability, despite political pressure for cuts. The Fed is expected to maintain its interest rate between 4.25% and 4.50% due to persistent inflation and a robust labor market. Recent economic indicators, including solid nonfarm payrolls and a high ISM services index, suggest ongoing economic resilience, influencing market repricing and term premiums.

Economic Data Fuels Yield Climb

The recent uptick in long-term yields reflects growing confidence in the U.S. economy’s durability. A series of economic indicators released over the past week have painted a picture of sustained momentum, particularly in the labor and services sectors.

On Friday, the U.S. Department of Labor reported a solid nonfarm payrolls increase for April, easing fears of an imminent recession. This was followed by Monday’s release of the Institute for Supply Management (ISM) services index, which showed that prices paid—a key inflation gauge—hit a two-year high. The data suggested that demand in the services sector remains strong, reinforcing expectations that inflationary pressures may persist longer than previously anticipated.

As a result, the yield on the 30-year Treasury note rose by three basis points to 4.87%, its highest level since mid-April. Meanwhile, the two-year yield fell to 3.80%, creating a bear steepening of the yield curve—a pattern where long-term rates rise faster than short-term ones, often signaling rising inflation expectations.

Market Repricing and Term Premiums

The movement in yields also reflects a repricing of term premiums—the extra compensation investors demand for holding longer-dated securities amid uncertainty. According to analysts, the resilience of the U.S. economy has led market participants to reassess the likelihood and timing of future rate cuts.

“Markets are now pricing in a higher term premium amid signs the economy is more resilient than previously thought,” said Benjamin Schroeder, senior rates strategist at ING. “There’s little prospect of a near-term interest-rate cut.”

Indeed, traders have scaled back their expectations for Federal Reserve easing in 2025. According to LSEG data, bets on rate cuts have been reduced to 75 basis points by year-end, down from 107 basis points just days earlier. The CME Group’s FedWatch tool shows only a 1.8% probability of a rate cut at the May meeting.

Federal Reserve Holds Steady Amid Political Pressure

The Federal Open Market Committee (FOMC) is set to conclude its two-day policy meeting on Wednesday, May 7. Despite mounting political pressure from President Donald Trump and Treasury Secretary Scott Bessent to lower borrowing costs, the Fed is expected to keep its benchmark rate unchanged for the fourth consecutive meeting.

Fed officials have consistently emphasized a data-dependent approach, prioritizing their dual mandate of price stability and maximum employment. With inflation still above the 2% target and the labor market showing strength, policymakers have signaled a cautious stance.

“The Fed remains comfortable waiting to assess the comprehensive impact of pending policy shifts before making further adjustments to the federal funds rate,” said economists at Wells Fargo.

Chicago Fed President Austan Goolsbee echoed this sentiment, stating, “The circumstance that we're in now, where there are a lot of major question marks, is more like we need to wait-and-see how these things are getting resolved.”

Inflation and Trade Policy Uncertainty

Inflation remains a central concern for the Fed. New York Fed President John Williams recently projected that inflation could rise to between 3.5% and 4% this year, while unemployment may climb to 4.5%–5% over the next 12 months. These projections suggest that the Fed may be reluctant to ease policy prematurely.

Complicating the outlook are the effects of new trade tariffs introduced by the Trump administration. While the full economic impact of these measures remains uncertain, Fed officials have indicated they will monitor developments closely before making any policy shifts.

“Tariff policies as announced would have large effects on prices and economic production, but it’s too early—and still too uncertain—to be prescriptive on rate policy,” said John Velis, Americas macro strategist at BNY.

Yield Curve Dynamics and Market Sentiment

The current yield curve configuration—a bear steepener—reflects a market environment where long-term inflation expectations are rising, while short-term rates remain anchored by Fed policy. The spread between the two-year and 10-year yields widened to 50 basis points, up from 48.4 basis points last Friday.

This steepening is also influenced by upcoming Treasury auctions, including a 10-year note auction scheduled for later this week. Analysts expect strong demand from both domestic and international investors, despite the recent rise in yields.

“Our expectations are that the 10-year auction will be well sponsored by both domestic and overseas participants,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. “It is still too early in the trade war to expect a meaningful rotation away from Treasuries as a reserve asset.”

Fed’s Economic Outlook and Policy Path

The Fed’s most recent Summary of Economic Projections, released in March, indicated a cautious outlook. The median forecast for U.S. real GDP growth in 2025 was revised down to 1.7% from 2.1% in December 2024. Inflation and labor market data will continue to guide the Fed’s decisions in the coming months.

While the central bank cut rates by a full percentage point in late 2024, it has since paused, holding rates steady in both January and March 2025. Analysts expect the Fed to maintain this stance in May, with only one rate cut projected for the fourth quarter of the year, contingent on economic developments.

References

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