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Key takeaways

  • In May and June, 10-year Treasury bond yields remained range-bound despite a volatile policy backdrop.

  • Year-to-date, U.S. Treasury total returns are just under 3% in an environment featuring significant stock market fluctuations.

  • Attractive bond opportunities may be found outside of the U.S. Treasury market despite their important role in portfolios.

10-year Treasury yields remained range-bound in recent weeks following a meaningful decline in the first quarter. Early in the year, 10-year yields peaked near 5% and then quickly troughed near 4%. From April through mid-June, yields mostly ranged between 4.2% and 4.6%. 1

Source: U.S. Bank Asset Management Group Research, Bloomberg as of June 18, 2025.

“Given the current 10-year Treasury yield, bond markets seem to be priced for an environment with 2% Gross Domestic Product growth and around 2.5% inflation,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “If we see 10-year yields move significantly lower, the question is whether it reflects declining inflation or slowing growth expectations.”

Bill Merz, head of capital markets research with U.S. Bank Asset Management Group, notes, “Both economists’ forecasts and consumer surveys suggest expectations for higher inflation later this year, but Consumer Price Index (CPI) and Producer Price Index (PPI) data haven’t yet shown growing price pressures. That gap must be reconciled eventually.” Year-over-year inflation, as measured by CPI, decreased from 3.0% in January to 2.4% in May. 2

Watching the Fed and Congress

At its June meeting, the policymaking Federal Open Market Committee (FOMC) chose to maintain the short-term federal funds target rate in the 4.25% to 4.50% range. In late 2024, the Fed cut rates three times but has held the line since December. Markets don’t anticipate another Fed rate cut before September 2025. 3

Source: U.S. Bank Asset Management Group Research, as of June 18, 2025.

Congressional actions may also affect fixed income markets. In early 2025, the federal government reached its debt ceiling limit, meaning no new debt is being issued. Instead, the Treasury Department is pursuing “extraordinary measures” to maintain government operations. This includes spending down much of the $800 million the Treasury holds in general account funds. “The Treasury can’t issue net new debt due to the debt ceiling, which is limiting the supply of Treasuries investors need to absorb and could have helped keep Treasury yields contained,” according to Merz.

“Eventually, additional Treasury supply will need to be absorbed by investors in order to fund the growing deficit. To avoid investors demanding higher yields, there would need to be some offsetting force, such as weaker economic growth, softer inflation, or Federal Reserve interest rate cuts.”

Bill Merz, head of capital markets research with U.S. Bank Asset Management Group

In the coming months, Congress must address the debt ceiling issue. Once Congressional action again suspends the debt ceiling, new Treasury debt can be issued, boosting supply. In addition, Congress is currently considering terms of the so-called “One Big Beautiful Bill Act,” which would extend current tax rates and potentially add new tax cuts, but only modestly trim spending. The Congressional Budget Office projects that the legislation would result in rising federal debt levels. 4

“Eventually, additional Treasury supply will need to be absorbed by investors in order to fund the growing deficit,” says Merz. “To avoid investors demanding higher yields, there would need to be some offsetting force, such as weaker economic growth, softer inflation, or Federal Reserve interest rate cuts,” says Merz. Another important consideration may be regulatory changes. The Federal Reserve will be meeting with other regulators to discuss softening rules that limit banks’ ownership of Treasuries. The extent to which revenue from proposed and implemented new tariffs may offset costs associated with new legislation will also impact the supply-and-demand equation.

Today’s yield curve

The yield curve, which refers to Treasury yields with different maturity dates, is normally upward sloping. That means longer-term bonds offer higher yields than shorter-term bonds, since investors typically demand higher returns to tie their money up longer. Rates set by the Federal Reserve, which influence shorter maturities more than longer maturities, can cause deviations in this relationship. The yield curve had been flatter than usual and was even negatively sloped from mid-2022 to later in 2024 as shorter-term policy rates were restrictively high and investors expected them to normalize in time. Currently, the 10-year Treasury yields 0.44% more than the 2-year Treasury. 1 By comparison, since 1977, 10-year Treasuries have historically averaged near a 0.8% yield spread over 2-year Treasuries.

U.S. Treasury Yield Curve Comparison June 18, 2024 and June 18, 2025 1

Source: U.S. Bank Asset Management Group Research, U.S. Department of the Treasury, as of June 18, 2025.

Finding opportunities in today’s bond market

How should investors approach fixed income markets today? Investors may wish to maintain a balanced approach to their fixed income position within portfolios that mix stocks, bonds and real assets. “Economic conditions should support continued earning growth, creating a good environment for normal allocations to generate return opportunities,” says Haworth.

Haworth says that within their bond portfolios, investors should explore the potential of more complex credits. For example, investors in high tax brackets may benefit by extending durations slightly longer and including an allocation to high-yield municipal bonds as a way to supplement their investment grade municipal bond portfolio. Some non-taxable investors should consider diversifying into structured credits, non-government agency issued residential mortgage-backed securities, commercial mortgage-backed securities and collateralized loan obligations. “Yield spreads between these types of credits and U.S. Treasuries remain relatively wide and their fundamentals look good,” says Haworth. For certain eligible investors, insurance-linked securities may offer a way to capture differentiated cash flow with low correlation to other portfolio factors and compelling return opportunities.

Talk to your wealth professional for more information about how to position your fixed income investments consistent with your goals, investment time horizon, risk tolerance and tax profile.

Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is generally free from federal taxes but may be subject to the federal alternative minimum tax (AMT), state and local taxes.

Frequently asked questions

The bond market often reflects other key factors that affect the economy. If the economy grows rapidly and inflation is rising, bond yields tend to follow suit. Bond yields also tend to rise if the Federal Reserve, the nation’s central bank, raises the short-term interest rate it controls, the federal funds target rate. Inflation in the U.S. began surging in 2021, and by early 2022, the Federal Reserve began raising rates. As a result, yields across the bond market also rose. In contrast, if the economy is slowing or maintaining modest growth with low inflation, bond yields tend to decline or remain low. This was the situation for an extended period prior to 2022. In mid-2024, bond yields began to decline again, and, in September 2024, the Fed began what was expected to be a series of rate cuts. Since the Fed’s initial rate cut, long-term bond yields moved higher, likely reflecting the market’s recognition of a strong U.S. economy.

Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond’s price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates. Bondholders will generally be repaid the face value of a bond if it is held to maturity, regardless of the interest rate environment.

There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels. However, even when interest rates are low, bonds can still be appropriate for inclusion in a well-diversified portfolio.

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Disclosures

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  1. U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates.

  2. U.S. Bureau of Labor Statistics.

  3. CME Group, FedWatch, as of June 18, 2025.

  4.  Congressional Budget Office, “H.R. 1, One Big Beautiful Bill Act (Dynamic Estimate), June 17, 2025.

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