Treasuries: The Steepening Resumes

The 30-year at 4.88% yields 109bp more than the 2-year. That's the term premium investors demand for lending to the U.S. government for three decades — and it's been grinding wider since the curve un-inverted in late 2024. Foreign central banks, once reliable buyers of long-duration Treasuries, have been net sellers. Japan's Government Pension Investment Fund rebalanced away from U.S. bonds in Q1. China's holdings continue their secular decline.

Domestic buyers — pension funds, insurance companies, mutual funds — absorb what foreigners shed, but they demand compensation. That compensation is the term premium, and it keeps the 30-year anchored near 5% regardless of what the Fed does with its overnight rate.

The transmission to household borrowing costs is direct. The 30-year fixed mortgage rate hit 6.46% on April 2, up from 6.00% on March 5 — a 46bp surge in under a month. Every basis point increase in the 10-year yield flows through to mortgage pricing within days. Prospective homebuyers waiting for rate relief need the 10-year below 4.00%, and nothing in the current fiscal trajectory suggests that's coming.

The spread whipsawed from 46bp to 56bp on March 27 before settling into a 51-52bp range through early April. That 10bp intraday swing reflected violent repositioning — leveraged funds unwinding short-curve steepener trades that had become crowded.

At 51-52bp, the 2s10s spread sits comfortably in positive territory. The curve spent 26 months inverted from July 2022 through September 2024, and every month of positive slope adds distance from the recession signal that inversion carried. But the type of steepening matters.

This is a bear steepening — both yields are elevated, but the long end stays higher because fiscal supply and inflation expectations dominate. In a bull steepening, the short end drops because the Fed is cutting aggressively into a recession. The 2-year at 3.79% is only 29bp above the fed funds ceiling of 3.50%. That's not a market pricing aggressive cuts.

Bear steepening regimes historically coincide with late-cycle economies where growth persists but fiscal dynamics deteriorate. The last comparable period was 2018, when the Fed was hiking into a strong economy while the deficit expanded under the Tax Cuts and Jobs Act. The spread stabilized around 50bp then too — before the curve inverted in 2019 as growth finally slowed.

For fixed-income positioning, the signal is straightforward: the belly of the curve (5-7 year maturities) offers the worst risk-adjusted return. The 5-year yields roughly 4.10%, giving you just 31bp over the 2-year for substantially more duration risk. Either stay short (2-year at 3.79%, minimal rate sensitivity) or go long (30-year at 4.88%, maximum yield pickup) depending on your economic view.

The March FOMC meeting produced a hawkish hold — rates unchanged at 3.50-3.75%, the dot plot showing just one cut remaining in 2026, and Chair Powell acknowledging that tariff-driven inflation could delay easing further. The market has already priced that messaging.

What the minutes will reveal on April 8 is the internal debate. Three questions dominate:

How explicitly did members discuss tariff inflation pass-through? The 15% global import surcharge is the single largest upside risk to inflation projections. If multiple members flagged tariffs as raising their inflation forecast by 50bp or more, the market will read that as hawkish — reducing December cut odds further and lifting the 2-year back toward 3.90%.

Did anyone dissent toward a hike? The March statement was unanimous, but unanimity in the statement doesn't preclude hawkish voices in the discussion. If minutes reveal that one or two governors argued the committee should "retain optionality" for rate increases, the front end reprices immediately.

What's the committee's read on oil-driven stagflation risk? Oil near $111 creates a classic supply shock — raising prices while depressing real incomes. If the minutes show the committee views oil as primarily a demand headwind (deflationary through growth), the curve flattens. If they view it primarily as a cost-push inflation risk, the curve steepens further.

The base case: minutes confirm the hawkish tone without revealing outright hike advocacy. That keeps the 2s10s spread in its 50-55bp range and sustains the current bear steepening regime. A surprise — genuine hike discussion or an unexpectedly dovish debate about cutting sooner — would break the range in the corresponding direction.

Bond traders should have positions sized before Wednesday's 2:00 PM release. Post-minutes volatility in the 2-year has averaged 8bp over the past four releases.

The yield curve is telling you three things simultaneously. The short end says the Fed holds — no hikes, no imminent cuts. The long end says fiscal supply overwhelms demand at current yield levels. And the spread says this late-cycle regime persists until something breaks.

Here's how to position across three scenarios:

Scenario 1: Bear steepening continues (base case, 60% probability). The economy absorbs oil and tariff shocks without recession. The Fed holds through 2026. The 2-year oscillates between 3.70-3.90%, the 10-year between 4.20-4.45%, and the 30-year stays pinned near 4.85-5.00%. Strategy: Barbell the curve — own T-Bills and short-dated Treasuries for income (3.72% average) and 30-year bonds for the 109bp spread pickup. Avoid 5-7 year maturities entirely.

Scenario 2: Recession and bull steepening (25% probability). Oil at $111 finally cracks consumer spending. Payrolls turn negative by Q3. The Fed cuts aggressively — 150bp by year-end. The 2-year drops below 3.00%, the 10-year falls to 3.50%, and the spread widens past 75bp. Strategy: Extend duration now. Buy 10-year Treasuries or TIPS for the capital gain as yields fall. The 10-year rallying from 4.31% to 3.50% produces roughly 7% total return.

Scenario 3: Inflation re-acceleration and flattening (15% probability). Tariffs and oil push core PCE above 4%. The Fed hikes once or twice, the 2-year jumps above 4.50%, and the 10-year rises to 4.60% — compressing the spread below 20bp. Strategy: Ultra-short duration only. T-Bills, money market funds, and floating-rate notes. Avoid anything beyond 2-year maturity.

The Treasury hub page tracks these yield movements daily. For a deeper understanding of how Treasury securities work across maturities, see the complete guide to T-Bills, T-Notes, and T-Bonds. If you're buying directly, the individual investor guide covers TreasuryDirect, brokers, and ladder strategies.