US Treasury Yield Curve Resembles Zero-Rate Era! Does the Market Really Believe Trump’s Call for "1% Rates"?

Over the past few weeks, Fed Chair Jerome Powell has faced mounting pressure from the Trump administration to slash interest rates to 1%. While the Fed has yet to act, certain signals in the US Treasury market suggest that aggressive rate cuts under a potential second Trump term may not be an unimaginable scenario...

Goldman Sachs interest rate strategists noted in a recent report that 5-year Treasury bonds are historically rarely as expensive as they are now compared to other maturities—except during periods when the Fed cut rates to zero.

On Wednesday, the 5-year Treasury yield stood at around 3.78%, still within the high range seen since early 2022. However, a common relative-value calculation in bond markets—which evaluates yields by comparing them to shorter and longer maturities—shows that 5-year Treasuries are currently at historically high valuations.

Their benchmark comparison is the 2-year and 30-year Treasury yields. In this so-called "butterfly spread" strategy, the 5-year yield is multiplied by two, then subtracted by the sum of the 2-year and 30-year yields. The current result is close to -100 basis points, near the lower end of the range since early 2021.

Goldman strategists Marshall and Zu stated that this valuation is largely tied to market assumptions about the timing and extent of Fed rate cuts—since the start of the year, expectations have grown for more near-term cuts and deeper cumulative easing.

However, the Goldman team believes this trend is unlikely to persist.

Driven by Fed rate-cut expectations, 5-year Treasuries have become the best-performing maturity in the US bond market this year, while persistent inflation and US budget deficit trends have exerted upward pressure on long-term yields. Goldman strategists wrote that this may also reflect market expectations of a "more dovish policy path after mid-2025" following a potential leadership change at the Fed next year.

Market data shows that since late last year, the 5-year Treasury yield has fallen by 60 basis points, while the 2-year yield dropped 52 basis points, and the 30-year yield remained largely flat.

Recently, Trump’s criticism of the Fed has grown louder. Last month, he posted on social media that the US could save trillions in interest costs if the Fed "did its job right." He argued that the US should pay 1% interest rates instead of the current 4.25%-4.50% range.