Treasuries: Rally Accelerates as 10-Year Yield Breaks Below 4.05% on Growth Fears and Flight to Safety

Treasury yields have fallen sharply across the curve in February 2026, with the most dramatic moves occurring in the belly and long end. The 10-year yield at 4.03% on February 23 represents a 26 basis point decline from the 4.29% level recorded on February 2 — a meaningful move in just three weeks. The 5-year note has tracked a similar trajectory, falling from 3.83% to 3.59% over the same period, while the 30-year bond has dropped from 4.90% to 4.70%.

The 2-year yield, at 3.43%, sits 21 basis points below its early-month level of 3.64%, reflecting evolving rate cut expectations. The 1-year note at 3.50% is now firmly below the effective federal funds rate of 3.64%, a configuration that implies markets expect at least one additional rate cut in the near term.

The 10-year/2-year spread, a closely watched gauge of curve steepness, has narrowed slightly from 0.72% at the start of February to 0.60% as of February 24. This compression is notable: the spread had been widening steadily since late November 2025, when it stood at just 0.55%. The recent flattening suggests the bond market's growth optimism is fading, with longer-duration yields falling faster than shorter maturities as recession hedging picks up.

Looking at the broader trajectory, the 10-year yield began 2026 at 4.19% on January 2, briefly surged to 4.30% in mid-January on fiscal policy concerns, and has since carved out a clear downtrend. The February move represents the most decisive directional shift since the initial post-election bond selloff reversed in late 2025.

The Federal Reserve's easing cycle has been the defining feature of the rate environment over the past 18 months, and the latest data confirms that the central bank is proceeding with measured deliberation. The effective federal funds rate stands at 3.64%, unchanged since the January 2026 FOMC meeting, which marked the most recent 25 basis point cut in what has been a graduated step-down from the cycle peak of 5.33% in mid-2024.

The trajectory of rate cuts tells a story of increasing caution. After the initial 50 basis point cut in September 2024 signaled urgency, the Fed moved to 25 basis point increments, cutting through the fall and winter of 2024-2025 before pausing for an extended period at 4.33% from January through August 2025. When cuts resumed in September 2025, they came at a deliberate pace: 4.22% in September, 4.09% in October, 3.88% in November, 3.72% in December, and 3.64% in January 2026.

The 2-year Treasury yield at 3.43% — sitting 21 basis points below the current fed funds rate — suggests markets are pricing in at least one more 25 basis point cut in the near term, with a possibility of two by mid-year. The gap between the 1-year note (3.50%) and the fed funds rate (3.64%) reinforces this view: the market sees short rates moving lower over the next 12 months.

Inflation data provides context for the Fed's measured approach. The Consumer Price Index (CPI) rose to 326.588 in January 2026, up from 326.031 in December and 318.961 a year earlier. This implies a year-over-year CPI increase of approximately 2.4%, which while significantly below the 2022-2023 peaks, remains above the Fed's 2% target. The persistence of above-target inflation — even as economic growth shows signs of cooling — creates a policy dilemma that explains the Fed's reluctance to accelerate the pace of cuts.

With unemployment ticking up to 4.3% in January from 4.4% in December (and 4.5% in November), the labor market is showing early signs of softening without yet flashing recessionary signals. This gives the Fed room to remain patient, but also increases the pressure to continue easing if the trend accelerates.

The fiscal backdrop remains a critical driver of Treasury market dynamics, and arguably the most underappreciated risk factor for bondholders in 2026. The federal deficit continues to run at historically elevated levels for a non-recessionary economy, and Congressional debates over tax policy and spending are adding uncertainty to the outlook for government borrowing.

The Trump administration's tax and deregulatory agenda, which economists have broadly characterized as growth-supportive, carries significant fiscal implications. Extension or expansion of the 2017 Tax Cuts and Jobs Act provisions — many of which are set to expire — could add trillions of dollars to projected deficits over the next decade. This matters directly for the Treasury market because higher deficits mean more bond issuance, and more supply puts upward pressure on yields, all else being equal.

The persistence of the 30-year yield above 4.70% — significantly higher than what policy rate expectations alone would justify — reflects this fiscal term premium. While the 10-year has rallied to 4.03%, the 30-year at 4.70% creates a 67 basis point long-end spread that compensates investors for bearing the risk of holding government debt over extended time horizons in an environment of structural fiscal expansion.

Treasury issuance patterns in 2026 continue to skew toward shorter maturities, as the department manages its average weighted maturity of debt. This has contributed to relatively well-bid auctions at the front end of the curve but has kept pressure on the long end, where supply concerns are most acute. The upcoming refunding announcements will be closely watched for signals about whether Treasury plans to shift issuance toward longer maturities — a move that could steepen the yield curve further.

The interplay between fiscal policy and monetary policy is also significant. As the Fed continues to reduce its balance sheet through quantitative tightening — allowing maturing Treasuries to roll off without reinvestment — the private sector must absorb a larger share of new issuance. This dynamic puts a floor under long-term yields even as the front end of the curve benefits from rate cuts.

US Treasuries continue to anchor the global fixed-income landscape, but the international context is evolving in ways that affect demand dynamics and relative value. UK long-term gilt yields averaged 4.45% in January 2026, down from 4.69% in September 2025, tracking a parallel easing trend to the US but at slightly higher absolute levels on a comparable-maturity basis. This spread compression has implications for foreign capital flows into US government debt.

The trade-weighted US Dollar Index has declined from approximately 120.1 in mid-January to 118.0 by late February, a move of roughly 1.7%. Dollar weakness typically supports foreign demand for Treasuries by making the total return more attractive in local currency terms for overseas buyers. However, the decline also reflects shifting growth expectations and tariff-related uncertainty that could cut both ways for capital flows.

Mortgage rates have emerged as a key transmission mechanism from the Treasury market to the real economy. The 30-year fixed mortgage rate fell to 6.01% in the week ending February 19, down from 6.22% in early December 2025, closely tracking the decline in 10-year Treasury yields. CNBC reported that rates briefly touched 5.99% on February 23 — matching the lowest level since 2022 — as a stock market sell-off drove investors into the relative safety of the bond market. With refinancing applications running approximately 130% higher year-over-year, the Treasury rally is having real-world economic effects.

Japan's ongoing yield curve control adjustments and European Central Bank rate decisions continue to influence global capital allocation. As both the Bank of Japan and ECB navigate their own policy cycles, relative yield differentials drive portfolio rebalancing that affects Treasury demand. The US 10-year yield at 4.03% still offers a meaningful premium over German bunds and Japanese government bonds, maintaining the attractiveness of US government debt for yield-seeking global investors — though the premium has narrowed from its 2024 highs.

For individual investors, the current Treasury market environment presents a nuanced set of opportunities and risks. The February rally has driven prices higher and yields lower, which is positive for existing bondholders but raises questions about whether the move has further to run.

The bull case for Treasuries centers on the growing possibility of economic deceleration. Jamie Dimon's stark warning this week — that elevated asset prices remind him of the pre-2008 environment and that his 'anxiety is high' — reflects a view shared by a growing number of market observers. If economic growth continues to soften and the Fed is compelled to accelerate its rate-cutting pace, the 10-year yield could break below 4.00% and test the 3.75-3.80% range. In this scenario, long-duration Treasuries would deliver meaningful capital gains on top of their coupon income.

The bear case, however, is equally compelling. Inflation at approximately 2.4% year-over-year remains sticky, and the fiscal outlook suggests persistent high issuance. If tariff policies lead to a resurgence in imported goods prices, or if the labor market proves more resilient than current trends suggest, the Fed could pause its easing cycle, and the 10-year could reverse toward 4.30% or higher. The 30-year at 4.70% already embeds a significant term premium, but that premium could widen further if deficit concerns intensify.

For practical portfolio positioning, several strategies merit consideration. First, the front end of the curve offers attractive risk-adjusted income: 2-year Treasuries at 3.43% provide yield close to the fed funds rate with minimal duration risk, and stand to benefit from further rate cuts. Second, the 5-year maturity at 3.59% represents a sweet spot for investors willing to accept moderate duration risk in exchange for positioning along the curve's most likely beneficiary of a growth slowdown. Third, Treasury Inflation-Protected Securities (TIPS) deserve attention given the persistence of above-target inflation alongside falling nominal yields — the implied breakeven inflation rate warrants monitoring as a gauge of market inflation expectations.

Investors should also consider the reinvestment risk embedded in shorter maturities. While T-bills and 2-year notes appear safe, the income they generate will decline if the Fed continues cutting, making it important to ladder maturities rather than concentrate at the front end. A barbell strategy — pairing short-duration holdings with selective long-bond exposure — can capture income while maintaining optionality on the economic outlook.