Investing.com – While US Treasury yields are expected to fall for the rest of 2025, the yield curve may continue to rise, according to analysts at Capital Economics.

Benchmark 10-year US government bond yields recently touched multi-month highs as investors fretted over the prospect of potential Federal Reserve interest rate cuts this year.

After reducing borrowing costs by a full percentage point by 2024, policymakers have signaled that they will be cautious in approaching future drawdowns, especially if there is uncertainty over future policies. administration of President-elect Donald Trump. Economists have warned that Trump’s plans, particularly his threat to impose more tariffs on imports from allies and rivals alike, could put renewed pressure on inflation – and then strengthen the case for the Fed to roll out more rate cuts gradually, if at all.

But these concerns were eased somewhat on Wednesday thanks to December’s reading of consumer price growth. The data showed that while US headline consumer prices rose as expected in December, the underlying measure that strips out volatile goods such as food and fuel rose at a slower-than-expected rate.

Bets that the Fed will choose to launch a couple of rate cuts by the end of the year were boosted after the publication of the numbers on Wednesday, and remain in play despite other strong economic indicators in later in the week.

Treasury yields, which tend to move inversely with prices, fell in response.

“Treasury yields have reversed in the back half of this week,” analysts at Capital Economics said in a note to clients on Friday.

But they note that the trend is concentrated mostly at the high end of the yield curve. This led to a “significant” steepening of the curve, the analysts said, adding that it “suggests to us that the near-term expectations for monetary policy – which in principle should directly affect the yields of short-dated shackles — haven’t been in the driver’s seat lately.”

This so-called “bear steepening”, where high-end yields rise more than short-ends, has left the bond market in a “slightly unusual place” compared to previous cycles of easing the Fed.

They argue that subsequent movements in bonds can be determined by two key questions: What caused high yields to eventually rise so high in the first place, and what is the likelihood that they will continue?

A possible explanation could be the increase in the term Treasury premia – the payment to investors required for bearing the risk that interest rates may move over the life of a bond – while investors are bracing for potential volatility during the Trump administration, analysts say.

However, while they noted that much depends on how Trump’s policies develop in the next few years, “all the signs seem, for us, to point to a slightly lower yield.”

Their forecast for the end of 2025 is 4.50%, about 10 basis points below current levels, while declines ahead of the curve appear “more pronounced.”