$500 Billion New Debt Deluge Hits Markets

The latest survey also shows that the policy-sensitive two-year Treasury yield is expected to fall by about 15 basis points to 3.60% in six months and then decline to 3.50% within a year.

Given the difficulty for long-term yields to weaken, this suggests the Treasury yield curve will steepen further, potentially widening the spread between these yields from around 50 basis points on Monday to 80 basis points in a year, as projected by the survey.

Collin Martin, Fixed Income Strategist at Charles Schwab’s Center for Financial Research, said, "The general uncertainty around trade policy and fiscal concerns—along with their potential impact on Treasury issuance—could keep longer-term yields, such as the 10-year Treasury yield, slightly elevated. Combining all these factors, we’re likely to see a steeper yield curve."

Nearly $500 billion in new debt is expected to flood the market this quarter alone. Many industry experts suggest heavy Treasury issuance in coming quarters will likely prevent long-term yields from falling sharply, even if inflation rises less than expected. This partly reflects a higher 'term premium'—the compensation required for holding long-term debt.

Martin noted, "Fiscal concerns could become a bigger issue given expectations for increasing Treasury issuance. The more debt we issue, the more buyers we need to find. You might need to see yields stay slightly higher to attract those marginal buyers."

These concerns may also be exacerbated by growing skepticism about central bank independence—fueled further by Trump’s recent attacks on Fed Chair Powell and the credibility of U.S. official statistics.

BlackRock’s Boivin stated, "We’ve long believed U.S. long-term rates will gradually rise… Over time, the compensation required for taking duration risk in Treasuries will increase, and this trend will gradually become apparent to investors."

He added, "Mathematically, we don’t have a deficit reduction plan, which is why the market—and us as investors—are forcing the issue by demanding higher yields… A steeper yield curve is currently a high-conviction structural bet in our portfolios."