Holding the Line: How Inflation and Fed Policy Shape the U.S. Bond Market - Rafa Fardin Rafe

1. Market Summary

The US Treasury bond market has recently experienced moderate volatility, primarily driven by shifting expectations around Federal Reserve policy and persistent inflation concerns. Yields on the 30-year Treasury have eased slightly from previous highs as investors speculate that the Fed may be nearing the end of its tightening cycle. However, with core inflation still above the 2 per cent target, scope for aggressive rate cuts remains limited.

Employment and GDP data have shown continued resilience, shaping expectations for long-term yields. Beyond domestic factors, geopolitical tensions and global growth uncertainty have also influenced demand for long-term Treasuries. Investors have intermittently sought the safety of US government bonds during market stress, helping to stabilise yields.

At the same time, fiscal pressures, including increased US debt issuance, have applied upward pressure on yields as supply continues to grow. Overall, the bond market remains delicately balanced between easing inflation optimism and structural fiscal constraints shaping long-term investor sentiment.

2. Technical View

The technical outlook for US Treasury bonds, particularly the 30-year yield, currently appears neutral to slightly bearish. The yield has been consolidating below the 4.70 per cent resistance level after a recent decline from 5.00 per cent highs.

Key support lies near 4.50 per cent, while resistance is observed between 4.90 and 5.00 per cent. The RSI indicator has rebounded from oversold levels, suggesting a short-term recovery, although momentum remains weak, indicating limited upside potential unless yields break above resistance.

Moving averages are flattening, reflecting trader indecision. If yields fall below 4.50 per cent, a deeper correction could follow, while a sustained move above 4.90 per cent would confirm renewed bearish pressure on bond prices.

Figure 1: US 30-Year Treasury Yield Technical Chart (Oct 2025) Source: TradingView (2025).

3. Fundamentals

US Treasury bonds remain strongly influenced by macroeconomic fundamentals, particularly inflation trends, GDP growth, and Federal Reserve policy. Recent data showing continued economic expansion and inflation above target have reinforced expectations that interest rates will remain higher for longer, weighing on bond prices.

Strong GDP readings signal economic resilience, reducing the likelihood of early rate cuts, while persistent inflationary pressures sustain upward pressure on long-term yields. On the supply side, rising government borrowing to fund fiscal deficits has boosted Treasury issuance, further straining prices.

Meanwhile, foreign demand has softened as global yields rise, diminishing the relative appeal of US Treasuries. Overall, market direction will hinge on how quickly inflation moderates and whether the Fed signals a shift towards easing in the months ahead.

4. Forecast

Base Case: Yields on the 30-year Treasury are expected to remain range-bound between 4.45 per cent and 4.85 per cent, as markets await clearer direction from the Federal Reserve. The Fed is likely to keep rates steady through early 2026, limiting volatility. Gradual improvement in inflation could encourage moderate buying, although fiscal deficits and heavy issuance will cap any strong rally.                                                                          

Bull Case: If inflation declines faster than expected and growth begins to slow, demand for Treasuries could strengthen significantly. In this scenario, yields may fall towards 4.20–4.35 per cent as investors price in future rate cuts and increase safe-haven allocations. However, optimism could reverse quickly if inflation reaccelerates.

Bear Case: A resurgence of inflation or stronger-than-expected economic data could push yields back above 5.00 per cent, reversing recent gains. Investors may demand higher compensation for long-term debt exposure amid fiscal expansion and persistent supply. Such a move would weaken bond prices and reintroduce volatility similar to that seen in 2023–2024.

5. Risks

Persistent Inflation: Higher-than-expected inflation may force the Fed to maintain restrictive policy, pushing yields higher and prices lower.

Stronger Economic Growth: Robust GDP or labour data could delay rate cuts, reducing demand for Treasuries and steepening the yield curve.

Fiscal Concerns: Rising government borrowing could flood the market with supply, pressuring bond prices. Geopolitical Tensions:Heightened global conflict or trade disruption may trigger sharp swings in safe-haven flows.

Monetary Policy Surprises: Unexpected shifts in Fed communication or balance sheet policy could cause volatility in yields and positioning.

References  

•             Grey, S. (2025) Pre-emptive Bank Bailouts for Fun and Profit. Financial Times, 29 October. Available at: https://www.ft.com/content/97c2ba4c-6d35-431d-a85e-af468e066e23 (Accessed: 30 October 2025).

•             TradingView (2025) US30Y Chart: TVC:US30Y. TradingView [Online Chart]. Available at: https://www.tradingview.com/chart/CxYCATlB/?symbol=TVC%3AUS30Y (Accessed: 30 October 2025).