Steepening Yields & Uncertainty: What says the Bond Markets?
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US Yield Curve in Image Above
Showing yields on May 27, 2024 vs May 27, 2025 . What happened in a year and how to understand this?
Looking at the image above, the yield curve was inverted on this day last year. Comparing last year’s term structure to today’s, we can see that the yield curve has steepened sharply.
What does this signify? Let’s dive deeper as we share our insights and assessment of what the bond market is doing.
At the March 16, 2022, meeting, the FED finally pivoted away from their "transitory inflation" narrative to a significant supply shocks narrative—supply-demand imbalances and Russia-Ukraine war-related uncertainty. This started a rate hike cycle, with rates peaking at 5.25%–5.50% in the July 26, 2023, meeting.
The Fed Funds rate was reduced by 100 bps, with a cut of 50 bps on September 18, 2024, and two cuts of 25 bps in the November and December 2024 meetings. The FED paused its rate cutting at the start of the year, citing—as we have all heard recently—that the inflation outlook remains tilted to the upside, and given policy uncertainty and trade tariffs, the risk to slowing growth continues to increase. Businesses are holding back spending due to this confusion and continued uncertainty. ** Refer to the image of FED rate path above.
The start of the rate hike cycle also began the FED’s balance sheet reduction program—from a peak of $8.97 trillion to the current balance of $6.69 trillion. **Refer to the image of FED's balance sheet above.
Rates remained elevated at these levels to bring down inflation, which peaked at 9.1% in June 2022. Inflation has currently eased to 2.3% as of April 2025. Refer to the CPI YoY image above.
Ray Dalio, Jamie Dimon, and most recently non-voter Kashkari (FED) highlighted stagflationary risks. FED Chair Powell noted risks to both sides of its dual mandate in its most recent meeting March 19, 2025.
In the March meeting, they also announced a slower pace of reducing Treasury securities, agency debt, and agency mortgage-backed securities. In this announcement, Treasury securities reduction slowed from $25 billion to $5 billion per month, while maintaining agency debt and agency mortgage-backed securities reduction at the same pace.
Many participants and analysts noted this as a dovish pivot. However, given the current market conditions and the supply-demand imbalance emerging within US Treasury and bond markets, we note the rising yields.
The yield curve steepening signifies that investors want better return on their bond holdings. The interesting turn of events here is that US Treasuries and bonds have not provided the safety they usually do in times of uncertainty and policy risk. The dollar has fallen in tandem with bonds, resulting in a devalued dollar and rising yields. Thirty-year yields touched the 5% level, and the DXY index traded at levels last seen in March 2022.
Looking deeper under the hood, we note that a repeat of COVID-pandemic-style stimulus measures may perhaps result in an uncontrollable inflation spiral. The ballooning twin deficits—i.e., trade and budget deficits—with the new “Big Beautiful Bill,” or as some analysts joked, noting this as a foreshadowing of the newest credit rating: “BBB.”
Any black swan event may just be the catalyst needed to tip these dominoes to start falling.
As we previously noted in some of our commentary, debt service payments are now more than defense spending.
The new bill, once passed, is going to add another $2.5 trillion to the deficit. While the deficit is an issue in the US, it is important to note that it is a global issue.
The key question here will be: in due time, will the US bond market and US dollar regain their usual haven status? Or will we continue seeing diversification into Gold, Bitcoin, and global markets?
So, to summarize these mechanics playing out in the US and global markets—in our view—sure, the US administration, one may debate, is not helping by creating this environment of uncertainty in global trade, coupled with a worsening deficit and higher-for-longer rates. The markets currently are perhaps at their most unpredictable stage, with so much going on in the US and across the world.
It is still too early to write off US exceptionalism, and there will be value in rotating back to US markets once the dust on policy uncertainty settles. We suggest that investors stay diversified, watch for any upside surprises to the inflation and do not chase yields blindly as the move may already be overstretched. It is also our view that we are past the extreme policy uncertainty having already noted Trump put when ES Futures fell over 20%.
Although note that near All-time highs or at 6000 level, we are likely to see further headline risks until trade deals are locked in. As always, be nimble, pragmatic and be ready to adjust with evolving market conditions.
Definitions
Plain-language definition: A “basis point” (bps) is 0.01%. So, a 50 bps cut = 0.50% reduction in interest rates.
Plain-language definition: A steep yield curve means long-term interest rates are much higher than short-term ones. This can reflect rising inflation expectations or increased risk.
A “black swan event”—an unpredictable crisis—could set off a chain reaction if confidence in US finances weakens further.
Trade deficit: Importing more than exports
Budget deficit: Government spending far more than it earns
