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On August 29, 2025, the U.S. Treasury bond market showed significant changes.According to U.S. Treasury Department data, at the close of the previous trading day (August 28), the 2-year Treasury bond’s regular maturity yield fell to 3.59%, the lowest level since September 27, 2024.This decline is even lower than the lowest point during the market turmoil in April 2025.This adjustment to the yield curve is not an isolated phenomenon, but the entire curve has seen a significant decline in the short-term (especially from 2 to 5 years), indicating that the market’s repricing of future interest rate paths.
This change has sparked widespread discussion.Mainstream media and economists tend to focus on Fed Chairman Jerome Powell’s speech at the Jackson Hall conference, believing it as the main factor driving the downward trend in the short-term yields.However, objective analysis shows that this is only part of the reason.The reshaping of the yield curve reflects more the market’s expectations for economic fundamentals, including weak labor market, a decline in inflationary pressures and the inevitability of Fed policy adjustments.More importantly, long-term yields (such as 10-years) did not soar as expected, but continued to challenge“The forecast of a rate of return explosion. This shows that the market is not“Reject “U.S. Treasury bonds, but instead express expectations for a low interest rate environment through curve adjustments.
Misunderstanding of mainstream views: inflation and oversupply of Treasury bonds
Over the past year, financial and social media have been flooded with two main arguments, saying interest rates should be maintained at high levels or further rise.The first is inflationary pressure, especially the so-called“Tariff inflation. The Federal Reserve has repeatedly emphasized inflation risks over the past three years, claiming that the economy is strong and only requires a limited rate cut (such as once). However, market data show that this concern lacks empirical support. The phased rise in consumer prices from 2021 to the first half of 2022 is more due to supply shocks (such as epidemics and geopolitical factors) than sustained inflation. 2025 data shows that the core inflation rate has stabilized near the 2% target, and the cooling of the labor market has further suppressed the momentum of price increase.
Taking Powell’s statement at the 2025 Jackson Hall conference as an example, he significantly downplayed the threat of tariff inflation and instead acknowledged the weakness of the labor market.This is not a sudden change, but a result that the market has long expected.The downside in short-term yields reflects the market’s consensus that the Fed has to cut interest rates, rather than inflation““Ghosts” expulsion. Economists tend to attribute inflation to excessive monetary policy easing, but ignore the role of global supply chain recovery and weak demand. Objectively, this bias stems from the perception limitations of the Fed and economists about the sources of inflation, who tend to use outdated Phillips curve models, while markets capture reality more accurately through forward-looking pricing.
The second misunderstanding is“Oversupply of Treasury bonds has led to global“Reject “U.S. Treasury. Some views link this to political factors, such as protests against Trump’s policy; others emphasize that debt is huge and insufficient buyers. Admittedly, the U.S. federal debt has exceeded $37 trillion (not excluding the cross-holding of federal government departments), which does have a crowding out effect on the private sector and exacerbate economic inequality. But this does not mean that the Treasury market is facing a crisis. On the contrary, the debt burden increases the downward pressure on the economy, which in turn increases demand for safe assets (such as federal bonds).
Historical data show that high debt environments often accompany low interest rate cycles as investors seek liquidity and hedge.The results of the Treasury bond auction from 2024 to 2025 are further refuted“Rejection. For example, in this week’s 2- and 5-year Treasury auctions, high yields (auction clearing rate) hit the lowest since September last year, showing strong demand. Although bid-to-cover ratios have slight declines, this is not a signal of oversupply, but a natural result of a decline in yields resulting in a decrease in pure investor participation. As yields fall from the 2023 10-year high, investors turned to other assets for higher returns, but overall demand has not weakened. Instead, auction prices continue to rise, confirming market preference for Treasury bonds.
The root of these misunderstandings is that the media relies on the perspectives of economists and central bank officials, and these groups are often out of market reality.The economist model assumes that the Fed controls all interest rates, but in reality, the market leads pricing through supply and demand dynamics.Social media amplifies a few opinions and forms an echo chamber effect, causing the public to ignore the behavior of most market participants.
The mechanism for the reshaping of the yield curve: from inversion to steepening of the bull market
Changes in the yield curve are key to understanding current dynamics.In 2023, the curve was deeply inverted (the interest rate spread reached a record negative in 2-10 years), reflecting that market expectations short-term interest rates rose due to the Federal Reserve’s interest rate hike, but long-term interest rates remained low due to the bleak economic outlook.This is consistent with the beginning of flattening curve in 2021, when the market had foreseeed the negative impact of the sequelae of the epidemic and the supply shock.
At the end of August 2024, the curve began to lift the uninversion, and the 2-10-year interest rate spread changed from negative to positive 1 basis point, and then expanded to 25 basis points after the Fed’s first rate cut of 50 basis points in September.This process is not an abnormal, but a typical one“Bull Steepening. In bull steepening, short-term yields fall faster, causing the curve to steeply from the front end, while long-term yields are relatively stable or slightly higher. This is with“The bear market is steeper” (long-term yields have risen sharply) in contrast.
Why is the bull market steeper?First, the Fed’s rate cut signal flips the risk-reward parameters.During the inverted period, investors prefer long-term Treasury bonds to hedge; after the interest rate cut is initiated, short-term Treasury bonds have greater potential, because once the Federal Reserve starts to cut interest rates, it is often difficult to stop.Historical cycles show that after each Fed’s first decline, short-term yields accelerated downward, while long-term stability is maintained due to economic uncertainty.After September 2024, long-term yields rebounded briefly, but this is not“Reject “Treasury bonds, but steeper mechanism: the market shifts from the long end to the short end, pushing up the long end with relatively low prices.
Secondly, economic fundamentals support this reshaping.Labor market data show that employment growth slows, and the Beveridge curve (the relationship between unemployment and job opening rates) shifts to the right, indicating structural weakness.The Fed acknowledges this“Transition, Powell stressed at Jackson Hall that labor risk is higher than inflation. This is consistent with market expectations: weak economic forces the Fed to cut interest rates rather than maintain highs. Goldman Sachs strategists point out that the relative value of the 5-year Treasury bonds (relative to shorter and longer term) are at all-time highs, only similar situations when the Fed approaches zero interest rates. This is not a coincidence, but market pricing the Fed will return to the ultra-low interest rate path.
In addition, swap spreads and recent changes in forward interest rates have been further confirmed.A narrowing of exchange spreads indicates abundance of liquidity, while a downward trend rate suggests long-term low interest rate expectations.Even Fed officials like John Williams began to acknowledge this reality, suggesting that interest rate environments in the late 2020s were similar to those in the 2010s.
Objectively comparative historical cycle: In 2005, Federal Reserve Chairman Greenspan said that long-term yields will not rise to“Puzzle”, but this stems from the false assumption-the yield curve follows the Fed like a series of one-year forward interest rates. In reality, the market is priced independently, taking into account global factors, economic cycles and investor behavior. The steepening of 2024-2025 is not a new puzzle, but a repeating historical pattern.
U.S. bond auction and market signals
US bond auction is inspection“Direct evidence of the rejection theory. Auction data for 2025 shows strong demand. Taking this week’s 5-year auction as an example, high yields fell to the lowest in September last year despite the decline in bid coverage, indicating that buyers are willing to accept lower returns. This has nothing to do with investors’ shift from a high yield environment, but rather rising security demand.
Analysis of bid coverage: For 2- and 5-year notes, this ratio fluctuation is negatively correlated with yield.When yields fall from their 2023 highs, pure investors decrease, but safe funds (such as pension funds, foreign central banks) increase.Since April 2025, despite the decline in the two-year yield, auction bids have increased, reflecting risk aversion and bets on the Federal Reserve’s further interest rate cuts.
More broadly, the proportion of foreign holdings of US Treasury bonds is stable, and global capital inflows have not decreased.Although the debt burden is heavy, its status as a reserve asset has not changed.Media exaggerates individual auctions“Poor”, ignore the overall trend: price increases, yields decline.
Future Outlook: Low Interest Rate Path and Policy Inspiration
The reshaping of the yield curve indicates that interest rates will further decline and remain low.The short-term end sinking indicates that the market expects the Federal Reserve to accelerate interest rate cuts and the target federal funds rate may be close to zero.Long-term stability challenge“Explosion” forecasts reflect economic downturn rather than inflation rekindled. The Fed should pay more attention to market signals than internal models. Economists need to reflect on inflation and interest rate theories to avoid political bias. Investors can pay attention to short-term Treasury opportunities, but beware of recession risks.
Overall, this reshaping is not dominated by the Federal Reserve, but the market’s response to reality.Ignoring mainstream noise and focusing on data will help understand future dynamics.
