Long-dated Treasuries face pressure as term premium rises

Markets overestimate cuts; long Treasuries remain vulnerable

Markets appear to be overestimating how much room the federal reserve has to reduce rates this year, even as some easing is discussed. Against that backdrop, several large asset managers are shorting long-dated U.S. Treasuries, reflecting concern that longer maturities remain exposed to persistent inflation risks and elevated term premia.

The divergence between policy-rate expectations and long-end yields is central. Front-end rates reflect the path of the fed funds rate, but the long end also prices fiscal deficits, supply of new bonds, and compensation for inflation uncertainty, factors that can keep long yields higher for longer.

Why this matters: neutral rate, inflation stickiness, term premium

A higher neutral rate would limit how far the Fed can safely cut without rekindling price pressures. Sticky components of inflation, especially in services, housing, and wages, mean progress may be uneven, reducing scope for aggressive easing despite cooling headline prints.

Officials have signaled caution about easing prematurely. As reported by Bloomberg, Dallas Fed President Lorie Logan said the policy rate may already be close to neutral, adding, “What might be good news … wouldn’t necessarily allow the FOMC to cut rates soon.”

Term premium, the extra yield investors demand to hold longer bonds, can rise when deficits swell and Treasury issuance increases, or when inflation uncertainty lingers. That premium can offset policy-rate trims, leaving 10- to 30-year yields elevated even as the Fed edges the front end lower.

If investors recalibrate to fewer or slower cuts, curve dynamics could re-steepen, with long-end yields remaining volatile as supply and inflation risks are repriced. In such a scenario, duration at the far end may underperform even if short rates decline modestly.

Key signals include the trajectory of core inflation, wage growth versus productivity, and labor-market slack. Treasury refunding announcements, auction bid metrics, and deficit trends may influence term premium, while energy or trade shocks could complicate the disinflation path.

At the time of this writing, Bitcoin (BTC) is quoted near $67,336, and recent readings imply elevated volatility and mixed sentiment. This cross-asset snapshot is contextual and does not indicate a view on policy or bonds.

How asset managers are positioned and why

BlackRock and PGIM views on long-dated Treasuries

As reported by TradeAlgo, a BlackRock portfolio co-manager has been selling and shorting long-dated Treasuries, citing stickier-than-expected inflation in services and wages as reasons to stay cautious on duration. The stance reflects concern that long-end yields may be slow to fall if disinflation is uneven. In a separate note of caution, CNBC reported that Larry Fink, CEO of BlackRock, warned markets may be expecting more rate cuts than the Fed can ultimately deliver.

As reported by Investing.com, PGIM Fixed Income has avoided adding long-duration Treasury exposure because of concerns about swelling fiscal deficits and the risk that long-end yields could remain elevated. Managers there see issuance and inflation uncertainty as reasons the term premium may not compress quickly.

Front-end versus long-end dynamics explained

The front end of the curve is most sensitive to the expected path of the policy rate over the next couple of years. The long end embeds longer-horizon growth and inflation expectations plus term premium, which is influenced by deficits, supply, and risk appetite.

This is why long-end yields can rise, or remain elevated, even if the Fed trims the policy rate. Shorting the long end expresses a view that investors are not being sufficiently compensated for duration and inflation risks at current levels, not necessarily a call on imminent recession.

FAQ about Fed rate cuts

Because term premium, sticky services inflation, and heavy issuance can keep long-end yields elevated even as policy rates edge down, limiting price gains in long-duration bonds.

What could push 10-year Treasury yields higher even if the Fed trims the policy rate?

A rising term premium from larger deficits and issuance, firmer inflation or wages, and weak auction demand could offset policy easing and pressure long-end yields upward.