The 5/30 Treasury yield curve has room to steepen as rate cuts fade and deficit fears rise

U.S. rate futures now price in only 6 basis points of cuts in 2026 and 15 basis points by late July 2025. That’s a sharp reversal from the 55 basis points of cuts expected before the war in the Middle East began, leaving investors focused less on near-term policy shifts and more on structural pressures building in the long end of the Treasury market. Front-end yields remain anchored as the Federal Reserve shows no inclination to hike, and the outlook still favors eventual rate cuts—driven by underlying labor market weakness and slowing growth from higher oil prices. But the long end is under pressure. Inflation expectations are rising, with Brent crude forecast to average $96 a barrel this year, and the Pentagon is seeking over $200 billion in supplemental funding for the Iran conflict—on top of a $900 billion base defense budget for fiscal year 2026. That surge in government borrowing amplifies deficit concerns, pushing long-dated yields higher as investors demand greater compensation for holding 30-year debt. The spread between five-year and 30-year Treasury yields was 96.9 basis points on Monday, up from 82 during the conflict’s peak but still below the pre-war 114 basis points. With front-end yields capped by easing expectations and the long end exposed to fiscal and inflation risks, the 5/30 yield curve has the most room to steepen.