(Corrects Gareth Nicholson’s title in paragraph 4 to chief investment officer at Nomura International Wealth Management, not chief investment officer at Nomura)
By Divya Chowdhury and Mehnaz Yasmin
(Reuters) – The Treasury yield curve could steepen as investors demand higher compensation for perceived fiscal and political risk amid rising pressure from the Trump administration on the U.S. Federal Reserve, bond fund managers said on Tuesday.
President Donald Trump’s persistent criticism of the Fed board and Chair Jerome Powell for not lowering interest rates, and his attempts to change the voting board’s composition are chipping away at investor confidence in the institution’s authority.
Yield curves steepen when long-term rates rise faster than short-term, reflecting concerns about a resurgence in inflation and bigger U.S. deficits. A popular trade this year, especially in the 5-year/30-year yield curve, has been for investors to buy the shorter end and sell the 30-year bond.
“If politics bends policy, I’d fade rallies in the dollar and stay nimble on duration,” Gareth Nicholson, chief investment officer at Nomura International Wealth Management, told the Reuters Global Markets Forum. “Treat dollar and long bonds as the first shock absorbers.”
Skepticism over the Fed’s independence is beginning to weigh on long-end yields, even as markets continue to conditionally trust the central bank, he said.
Persistent U.S. deficits and heavy bond issuance have kept long-term Treasuries pressured even as short-end yields price in more aggressive Fed rate cuts.
The two-year yield, which typically moves in step with Fed rate expectations, fell to 3.51% on Tuesday after climbing to 3.578%, while the 10-year was at 4.03%, down in recent weeks as softer labor data spurred bets on policy easing.
Nicholson expects front-end yields to fall toward the high-2% range if labor market softness persists, with the long-end staying broadly anchored in the 3%-4% band. He sees a modest curve-steepening in early-2026 as monetary easing is weighed against supply dynamics.
Stephen Parker, co-head of global investment strategy at J.P. Morgan Private Bank, said investors were not being adequately compensated for inflation and fiscal worries, with “the long end of the Treasury curve (being) most sensitive to those risks.”
Mike Wilson, Morgan Stanley’s chief investment officer, said policymakers will likely seek to repress yields even at the risk of reigniting inflation.
“That is why people are abandoning sovereign debt and choosing to buy stocks and other assets,” Wilson said, adding, however, that he expects back-end yields to decline in the near-term as bill issuance, Treasury buybacks and Fed rhetoric pressure rates lower.
As Treasuries lose some appeal, bond fund managers expect private credit will increasingly fill the yield and diversification gap.
“Private credit still pays for patience,” Nomura’s Nicholson said, highlighting opportunities in secondaries, infrastructure, renewables, and logistics-focused real estate.
J.P. Morgan’s Parker noted corporate sector fundamentals remain strong, with spreads only appearing tight due to distorted Treasury market dynamics. “Our preference is to focus on carry over long duration,” he said.
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(Reporting by Divya Chowdhury in Mumbai and Mehnaz Yasmin in Bengaluru; Editing by Nia Williams)
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