The U.S. Treasury market opened under pressure this morning, with yields climbing across the curve, particularly in the long end. The 30-year Treasury yield surged past the critical 5% threshold, while the 10-year yield also moved higher, reaching 4.52%. This movement marks a continuation of a bear steepening trend—where longer-term rates rise faster than shorter-term ones—reflecting renewed market unease around inflation risks and fiscal policy.

Long-End Leads Selloff Amid Global and Domestic Pressures

Driving today’s weakness in Treasuries is a combination of stronger-than-expected UK inflation data and growing anxieties around U.S. fiscal sustainability. As traders in New York returned to their desks, headlines related to ongoing budget negotiations in Washington added to the bearish sentiment. The prospect of a prolonged political standoff over fiscal matters is once again casting a shadow over the long-term outlook for U.S. debt.

Yield curves are reacting accordingly. The 2s10s spread widened to 53.25 basis points, gaining 2 basis points on the day, while the 5s30s spread also steepened to 91.25 basis points, up nearly 2 basis points. These movements highlight that the market is pricing in increased term premium and inflation risk over longer horizons, even as short-term policy expectations remain relatively stable.

Credit Spreads and Fed Pricing Shift Slightly

Amid the broader rate move, credit spreads are opening slightly tighter, with compression of around 0.5 to 0.75 basis points, particularly at the long end. This could reflect a modest increase in risk appetite in credit markets, or technical positioning ahead of upcoming supply.

Market-implied expectations for Federal Reserve policy also nudged higher. The pricing for rate cuts by the end of the year rose marginally, with futures markets now reflecting about 50.5 basis points of easing by December. However, trading activity in futures remains muted, suggesting a degree of caution or uncertainty among participants as the macro picture remains fluid.

Auction Spotlight: 20-Year Bonds Face Crucial Test

All eyes are now turning to Wednesday’s 20-year bond auction—a critical event that could offer deeper insight into investor sentiment. Yields on the 20-year have climbed significantly, now sitting over 25 basis points higher than at the time of the last auction. Despite this substantial cheapening, the 10s20s30s fly—a measure of relative value across the curve—has remained largely stable, indicating that the 20-year’s move may be more idiosyncratic than curve-driven.

This auction will serve as a litmus test for demand at the 5% yield level, particularly from real money investors such as pension funds and insurance companies. Their participation will be closely scrutinized, especially given the broader backdrop of a deteriorating U.S. fiscal outlook and rising long-term borrowing costs.

Swap Market Activity and Roll Progress

In the swap space, desks are reporting steady receiving interest in the 5- to 10-year segment from real money accounts. This activity could be a sign that institutional investors are beginning to see value in locking in current yield levels, even as the cash market sells off. Meanwhile, the Treasury roll market is progressing at a healthy pace, with approximately 10% of positions rolled already, led by the 5-year note.

The Treasury market is sending a clear message: investors are reassessing risk in light of sticky global inflation and renewed fiscal uncertainty in the U.S. With long-end yields breaching psychologically important levels, and a key auction looming, the coming days will be crucial in gauging whether real money demand can stabilize the market—or whether further steepening lies ahead.