Treasury Yields Rally on Slumping Confidence

A significant drop in consumer confidence has resurrected the yield-curve steepening trend in Treasuries, a pattern that had recently stalled. The Conference Board's gauge of consumer sentiment unexpectedly fell in January to its lowest point in over a decade.

This downturn in sentiment has reinforced expectations for two Federal Reserve interest-rate cuts within 2026. Consequently, short-maturity Treasury yields declined, with the two-year note's yield falling more than three basis points from its daily high.

Throughout most of the preceding year, anticipation of Fed rate cuts drove down short-term Treasury yields. Longer-maturity yields, however, remained elevated due to inflation expectations and anticipated increased borrowing. This divergence created the widest yield differentials in years.

However, earlier in January, signs of an improving job market, including a lower unemployment rate, caused shorter-maturity yields to rise. This trend narrowed the key yield differentials.

Yields on two-year notes reached levels over 65 basis points lower than 10-year yields, supported by strong demand at an auction. Despite less robust demand for five-year notes, rising 30-year yields widened the differential by nearly four basis points, the largest single-day increase this year.

Federal Reserve policymakers are expected to keep rates steady at their first meeting of the year. However, market indicators suggest a full cut is priced in by July, with another anticipated by year-end.