US Treasury Yields Retreat After Spike in Long-Term Interest Rates

Financial markets are ‘increasingly attuned to concerns about U.S. government creditworthiness,’ says one ING strategist.

Wall Street in New York City on April 4, 2025. Samira Bouaou/The Epoch Times

U.S. Treasury yields took a breather after long-term interest rates surged midweek on intensifying debt concerns.

Yields on U.S. government bonds were in the red on May 22, with the benchmark 10-year yield dropping by 5 basis points, to about 4.547 percent. (One basis point is 1/100 of a percent.)

The 30-year Treasury yield dipped more than 2 basis points, to 5.065 percent. The long-term bond had been as high as 5.14 percent during the session, its highest level since October 2023, before erasing its gains.

Investors are fearing that the demand for U.S. bonds is beginning to wane. This concern was displayed in the financial markets following the dismal $16 billion auction of 20-year bonds on May 21, resulting in one of the worst performances in the security’s five-year history.

At the end of the bond sale, the auction led to a high yield of 5.047 percent, sending U.S. stocks tanking in the middle of the trading week.

“In a market increasingly attuned to concerns about deteriorating U.S. government creditworthiness, a weaker 20-year U.S. Treasury auction led to a spike in yields,” Benjamin Schroeder, a senior rates strategist at ING, wrote in a note. “While the 20-year maturity has a tendency to be a trickier sell, the results were enough to push 30-year yields beyond 5 percent, ending the day up by 10 basis points.”

The next Treasury auctions will feature three notes: $69 billion of the two-year note (May 27), $70 billion of the five-year note (May 28), and $44 billion of the seven-year note (May 29).

Mounting concerns surrounding the federal government’s fiscal health have become the talk of Wall Street.

On May 16, Moody’s downgraded the United States’ long-term credit rating by one notch, citing the country’s national debt and interest payments.

Investors will also monitor the effect of President Donald Trump’s “One Big Beautiful Bill,” which the House advanced by a one-vote margin to the Senate on May 22. The Congressional Budget Office and the Joint Committee on Taxation estimate the legislation could add nearly $4 trillion to the deficit.

If projections are accurate, the bill will force the Treasury to inject more supply into capital markets, say UBS analysts.

“Trump’s tax cut package is likely to see various amendments before it is signed into law, but it nonetheless is expected to add trillions of dollars to the country’s U.S. $36 trillion deficit over the next decade,” they said in a note. “This will likely lead to an increase in the supply of Treasury debt, exerting pressure on the bond market.”

Will yields hover around these levels, or could they venture higher?

According to Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, Treasury yields could go “a lot higher.”

“Back in 1981, the 10-year yield stood above 15 percent, and the 30-year has been steadily declining from near 10 percent since 1987,” Ozkardeskaya said in a note emailed to The Epoch Times. “I don’t expect a return to those extremes, but a sustained move above 5 percent—especially if underpinned by structurally higher inflation—is definitely possible.”

Other markets, meanwhile, have also witnessed significant movements in long-term rates.

In Japan, the 30-year government bond surged above 3 percent during the trading week beginning May 18 for the first time. In the United Kingdom, the 30-year bond reached 5.55 percent, the highest level since January 1998.

Growth, Inflation, Rates

Another development occurred in the U.S. Treasury market this week that could indicate market sentiment and economic expectations.

The spread between the five-year and 30-year bonds widened to 1 percent for the first time since October 2021. It has gradually increased since reaching negative 0.36 percent in July 2023.

The last time the spread reached 1 percent, the annual inflation rate was above 6 percent, and the third-quarter gross domestic product (GDP) growth rate was 3.5 percent.

The Department of the Treasury in Washington, on May 21, 2025. Madalina Vasiliu/The Epoch Times

When the spread widens, it typically signals that investors project solid growth, higher inflation, and that the Federal Reserve will keep interest rates higher for longer. A narrower spread can suggest investors penciling in slower growth and shifting monetary policy.

Over the past few months, economists have been forecasting lower growth prospects and rising inflation, though these predictions have been adjusted amid the Trump administration’s softening trade stance.

BNP Paribas economists, for example, anticipate the average annual inflation rate will reach 4 percent by the second quarter of 2026, up from the current headline rate of 2.3 percent.

On the GDP front, they forecast that the year’s average annual growth rate will be 1.3 percent.

“This weakening from the effect of uncertainty and tariff shocks on demand and the general macroenvironment prompted a return of the recession risk,” they wrote.

As for the Federal Reserve, the futures market is penciling in the next quarter-point interest rate cut in September, according to the CME FedWatch Tool. A month ago, investors expected Fed policy action at the June or July meeting of the policy-making Federal Open Market Committee (FOMC).

Goldman Sachs economists anticipate that the Fed will pursue a slower pace of rate cuts but will initiate “a series of three 25-basis-point cuts in December rather than in July.”

“Under our new economic baseline, we continue to expect the Fed to deliver three further 25-basis-point cuts,” Jan Hatzius, Goldman Sachs Research’s chief economist, said in a note. “However, the rationale for cuts in our forecast shifts from insurance to normalization as growth remains somewhat firmer, the unemployment rate rises by somewhat less, and the urgency for policy support is reduced.”

The FOMC will hold its next two-day meeting on June 17–18.