US Treasury Analysis

The February Treasury rally has been remarkably broad-based, with yields declining across every maturity on the curve. The 10-year yield's drop from 4.29% on February 2 to 4.04% on February 13 — a 25-basis-point decline in less than two weeks — represents one of the sharpest short-duration moves since the October 2025 rally. The 30-year bond yield fell 22 basis points over the same period, from 4.91% to 4.69%, while the 2-year note dropped 17 basis points from 3.57% to 3.40%.

The asymmetry of the move matters. The long end of the curve — the 10-year and 30-year — has rallied harder than the short end, which suggests this is not merely a repricing of near-term Fed rate expectations. Instead, the bond market appears to be discounting a lower path for long-run growth and inflation expectations. The 10-year to 2-year spread narrowed from 0.72% in early February to 0.62% by February 17, though it remains firmly in positive territory — a meaningful shift from the deeply inverted curve that persisted through much of 2023 and 2024.

Placing this in a broader context, the 10-year yield bottomed near 4.00% in late November 2025, rallied back to 4.30% by late January, and has now retreated to the low 4.00% range again. This oscillation between 4.00% and 4.30% over the past three months has created a trading range that reflects genuine uncertainty about the economy's trajectory. Each time yields approach 4.30%, buyers step in. Each time they dip toward 4.00%, sellers emerge. The market is, in effect, waiting for a catalyst to break decisively in one direction.

Perhaps the most consequential development in the Treasury market over the past four months has been the normalization of the yield curve. The 10-year to 2-year spread, which was deeply inverted through much of 2023 and 2024, has now been positive since late 2024 and has been steadily steepening. From approximately 0.50% in late October 2025, the spread widened to 0.74% by late January 2026 before settling at 0.62% in mid-February.

This re-steepening is a textbook signal of a maturing easing cycle. The 2-year yield, which most directly reflects expectations for Fed policy over the next 24 months, has dropped substantially from the 4.80%+ levels seen in mid-2024 to the current 3.40%. This decline prices in a Fed that has already cut rates significantly and may cut further. The 10-year yield, by contrast, has proven stickier — unable to break below 4.00% on a sustained basis — because it embeds not just rate expectations but also term premium, inflation risk, and the growing supply of Treasury debt.

The current spread of 62 basis points is historically modest by the standards of a post-easing environment. In previous cycles, the curve has steepened to 150–250 basis points once the Fed has finished cutting. If the current spread is the beginning of a normalization that has further to run, it implies either the 2-year has more room to fall (i.e., more rate cuts ahead) or the 10-year has room to rise (i.e., term premium expansion). For long-duration bond holders, this distinction is everything.

The Federal Reserve has cut its target rate by a cumulative 170 basis points since the easing cycle began in September 2024, bringing the federal funds rate to a target range of 3.50–3.75% — as confirmed by the effective federal funds rate holding steady at 3.64% throughout January and February 2026. This represents a significant, but measured, recalibration from the 5.25–5.50% peak that prevailed from July 2023 through August 2024.

The pace of easing tells a story of its own. After an initial 50-basis-point cut in September 2024, the Fed delivered 25-basis-point reductions in November and December 2024, then held steady through the first eight months of 2025 before resuming cuts in September 2025. The most recent cuts brought the rate from 4.33% in August 2025 to 3.64% by January 2026 — a pace that suggests urgency without panic.

The central tension for the Fed is clear: inflation remains above target, but the economy is showing signs of deceleration. The Consumer Price Index reached 326.6 in January 2026, up from 319.0 a year earlier — an annual increase of approximately 2.4%. While this represents progress from the peak inflation of 2022-2023, it remains above the Fed's 2% target and has shown no signs of accelerating its descent in recent months. The monthly CPI increases from November 2025 (325.1) to December (326.0) to January (326.6) suggest prices are still rising at a pace that keeps the Fed cautious about further easing.

Meanwhile, the labor market is sending mixed signals. The unemployment rate ticked down to 4.3% in January 2026 from 4.4% in December and 4.5% in November, an improvement that suggests the labor market has stabilized rather than deteriorated. But this level represents a meaningful drift higher from the 4.1% rate seen in June 2025. The Fed is likely watching for any re-acceleration in job losses as a signal to cut more aggressively, while simultaneously monitoring services inflation and wage growth for signs that easing has gone too far.

Markets are currently pricing in one to two additional 25-basis-point cuts in 2026, which would bring the terminal rate to the 3.00–3.25% range. But the February rally in long-duration Treasuries suggests some participants are betting on a more aggressive path — perhaps driven by economic data that has yet to fully materialize.

No analysis of the Treasury market in 2026 is complete without addressing the fiscal backdrop, which has become the single most important structural driver of long-duration yields. The federal deficit, which exceeded $1.8 trillion in fiscal year 2025, shows no signs of narrowing. Interest payments on the national debt now consume a larger share of federal spending than at any point since the early 1990s, and the Treasury Department continues to issue record volumes of new debt to finance ongoing operations.

This supply dynamic is the primary reason the 10-year yield has struggled to break below 4.00% despite 170 basis points of Fed rate cuts. In a normal easing cycle, long-term yields would fall more substantially as the market prices in lower policy rates. Instead, the 10-year has dropped only about 70 basis points from its October 2023 highs near 5.00%, while the 2-year has fallen nearly 160 basis points from its peak. The gap reflects what fixed-income strategists call 'term premium expansion' — the extra yield investors demand for holding longer-duration government debt in an era of unprecedented supply.

The housing market is providing a real-time illustration of how these fiscal and monetary dynamics interact. Despite the Fed cutting rates by 170 basis points, the 30-year fixed mortgage rate has declined only modestly — from 6.23% in late November 2025 to 6.09% as of February 12, 2026. This stubborn resilience in mortgage rates, which are priced off the long end of the Treasury curve, helps explain why January home sales plunged 8.4% — the biggest monthly drop since February 2022 — to a seasonally adjusted annualized rate of 3.91 million units. The National Association of Realtors' chief economist, Lawrence Yun, called it 'a new housing crisis,' noting that 'Americans are stuck.'

The disconnect between Fed rate cuts and mortgage rates is a direct consequence of term premium. As long as the government is issuing trillions in new debt, the long end of the curve will resist the gravitational pull of lower short-term rates. For Treasury investors, this means the yield curve could continue steepening even without additional Fed cuts, as the long end reprices for supply rather than for growth expectations.

A new and underappreciated risk factor has emerged for the broader fixed-income landscape: the potential for AI-driven disruption to trigger a wave of corporate defaults that could, paradoxically, drive safe-haven flows into Treasuries. UBS credit strategist Matthew Mish warned in a February research note that the $3.5 trillion leveraged loan and private credit markets face $75 billion to $120 billion in fresh defaults by late 2026, as AI transformation threatens software and data services companies — many of them owned by private equity with elevated leverage.

'The market has been slow to react because they didn't really think it was going to happen this fast,' Mish told CNBC. 'People are having to recalibrate the whole way that they look at evaluating credit for this disruption risk, because it's not a 2027 or 2028 issue.'

For Treasury investors, a credit crunch in leveraged loans and private credit would likely trigger a flight-to-quality bid into government bonds, pushing yields lower. This scenario represents an asymmetric risk: if AI disruption accelerates beyond current expectations, the resulting corporate stress could become a powerful tailwind for Treasury prices. The fact that the 10-year yield has been drifting lower even as equity markets remain near highs suggests some of this risk repricing may already be underway.

Globally, U.S. Treasuries continue to offer a significant yield premium over comparable sovereign debt. German 10-year Bunds yield approximately 2.5%, while Japanese government bonds remain below 1.5%. This spread, while narrower than it was at its peak in 2023, continues to attract foreign capital into U.S. government debt — a structural support that has helped absorb the massive increase in Treasury supply. However, geopolitical risks and the possibility of de-dollarization at the margins remain long-term headwinds to foreign demand.

For individual Treasury investors, the current environment presents a rare combination of attractive income and genuine uncertainty about direction. The 10-year yield at 4.04% offers a real yield (after subtracting the roughly 2.4% annual CPI increase) of approximately 1.6% — a level that was unthinkable during the ZIRP era of 2009-2021 and that compares favorably to long-run historical averages.

The bull case for Treasuries rests on three pillars: first, that the economy is slowing more than headline indicators suggest, with housing weakness and potential AI-driven credit stress as leading indicators; second, that the Fed has room to cut further if unemployment rises or financial conditions tighten; and third, that any significant equity market correction would drive safe-haven flows into government bonds. Under this scenario, the 10-year could test 3.75% by mid-year.

The bear case is equally compelling. Inflation at 2.4% remains above target, and recent monthly CPI readings show no meaningful deceleration. The fiscal deficit shows no signs of narrowing, which means Treasury supply will continue to expand. And if the economy proves more resilient than the bond market currently expects — perhaps buoyed by AI-driven productivity gains — the February rally could reverse quickly, sending yields back toward 4.30% or higher.

Practical positioning depends on time horizon. For investors seeking income with a hold-to-maturity strategy, current yields across the curve offer compelling nominal returns: 3.40% on the 2-year, 4.04% on the 10-year, and 4.69% on the 30-year. The 2-year, in particular, offers an attractive risk-adjusted profile given its limited duration exposure and its proximity to the current fed funds rate. For those willing to take duration risk, the 30-year at 4.69% locks in nearly a 5% coupon for three decades — a level that historically has been associated with strong long-term total returns.

The key risk for duration holders is a scenario in which inflation re-accelerates or the deficit forces a further repricing of term premium. In such an environment, long bonds could suffer significant mark-to-market losses even as coupon income remains attractive. A laddered approach across the 2-year, 5-year, and 10-year segments of the curve may offer the best balance of income and flexibility for individual investors navigating this uncertainty.