Investors Ditch Long-Term US Bonds Amid Diminished Hopes for Aggressive Fed Cuts

Investors are turning away from long-term U.S. Treasury bonds as expectations for significant Federal Reserve interest rate cuts fade. Many now believe the Fed will keep rates steady during this week’s policy meeting, with futures showing odds of only two rate cuts in 2025. Soft inflation readings in May had briefly revived hopes for monetary easing, but the absence of a clear recession risk has weakened those expectations. Long-duration bond positions have declined in recent months, as reflected in J.P. Morgan’s survey and bond fund indexes.

The shift away from long-term bonds is also driven by growing fiscal concerns tied to President Trump’s proposed tax and spending plan, which could significantly widen the U.S. deficit. The “One Big Beautiful Bill Act,” currently under Senate review, could increase the deficit by $2.4 trillion over the next decade. Investors are demanding higher yields to compensate for long-term risk, especially with U.S. debt now at 120% of GDP. Analysts expect a steeper yield curve as a result, favoring short-term over long-term government securities.

Despite some brief interest during a recent 30-year bond auction, investor appetite for longer maturities remains cautious due to fears of inflation and fiscal instability. Yield curve steepening has become a popular strategy, with investors shifting toward short-dated Treasuries while avoiding the back end. Bond experts argue this positioning reflects not only rate expectations but also concerns about potential volatility and policy uncertainty stemming from tariffs and spending.

Goldman Sachs recently reduced the odds of a U.S. recession to 30%, citing easing tensions over Trump’s tariff policies. While fears briefly spiked earlier in the year, Trump has since rolled back several trade barriers, reducing inflationary pressure. Still, market confidence in aggressive Fed rate cuts has waned, and most traders now see the next policy move coming late in the year or in early 2026. Until then, conservative positioning in fixed-income markets is likely to persist.

Investors will be closely watching the Fed’s updated economic projections and “dot plot” this week for any changes in the expected rate path. The central bank’s last forecast in March suggested two cuts by the end of 2025, but many analysts doubt that outlook will shift. With mounting fiscal concerns and muted recession fears, the bond market seems to be settling into a cautious stance—favoring shorter durations and preparing for a slower path to lower interest rates.

Source: Reuters