Yield Curves Under Trump 2.0

Key Takeaways

• War‑driven expectations lifted short‑term Treasury yields
• Long‑term yields rose on inflation and deficit concerns
• 5‑year Treasury CDS spreads widened to 37 bps
• Tariff fears previously pushed 1‑3 year yields lower
• Steeper curve may tighten corporate financing conditions

Pulse Analysis

The recent reversal of the long‑standing flattening trend in U.S. Treasury yields reflects a confluence of geopolitical and policy forces. Prior to May, the curve had been compressing as the Federal Reserve kept the policy rate near historic lows and tariff announcements dampened growth outlooks. Investors favored longer‑dated bonds, driving yields down across the board. This environment, often dubbed "Trump 2.0" for its protectionist tilt, set the stage for a dramatic shift once the war erupted.

War expectations immediately altered the short‑end of the curve. Market participants now price a higher Federal Funds target three months out, anticipating that the Fed may need to tighten to counter war‑induced inflation. At the same time, inflation forecasts for the six‑month to ten‑year horizon have risen, pushing longer‑term yields upward. The fiscal impact of war spending—estimated to add several hundred billion dollars to the deficit—further pressures the long end, as investors demand a risk premium for higher sovereign debt levels.

The steepening has practical implications for investors and policymakers. Higher short‑term rates increase the cost of rolling over Treasury debt, while elevated long‑term yields raise the financing burden for infrastructure and corporate projects. The rise in 5‑year Treasury CDS spreads signals growing concern over credit risk, prompting a reassessment of duration exposure in fixed‑income portfolios. Stakeholders should monitor Fed communications, inflation data, and fiscal policy updates, as these will dictate whether the curve maintains its steep shape or reverts to a flatter trajectory.