Recent fluctuations in the U.S. Treasury market, particularly in the 2-year bonds, have caught significant attention. Over the past month, the yield on 2-year U.S. Treasuries surged by 42 basis points, with 10-year and 30-year yields surpassing key psychological thresholds of 4.3% and 4.5%, respectively.
According to a UBS report, the primary catalyst for this sell-off is the decreased probability of a U.S. economic recession, rather than structural risks like foreign capital withdrawal or debt concerns. The report highlights that the market's volatility is largely centered on the cyclical narrative reflected in the 2-year Treasury yield.
Since late April, the market's expectation for the Federal Reserve's rate cuts in 2025 has diminished by 50 basis points, contributing to the yield increase. Yield spreads between various maturities, such as the 2-year and 5-year, have remained relatively stable, reinforcing the view that cyclical factors, not structural changes, are driving the current market dynamics.
UBS suggests that while structural changes in U.S. Treasuries are evident, they are not recent. The yield curve's steepening is seen as a natural market adjustment rather than a debt crisis. Long-term investors might find the 30-year bond yields attractive if they approach 5%, although short-term risks remain due to potential CPI increases.
