• 2-year and 5-year Treasury yields plunge to lowest levels since May 2025
  • Markets price in near-certain September Fed cut, with some expecting 50bps move
  • Dollar weakens as softening economic data fuels dovish policy expectations

Yield slide accelerates

The U.S. Treasury market's rally intensified Thursday as the 2-year yield tumbled to 3.686%, marking its third consecutive daily decline and the lowest level since mid-May. The 5-year note followed suit, hitting similar multi-month lows amid heavy buying pressure across the curve.

Traders are increasingly convinced the Federal Reserve will cut rates next month, with swap markets now reflecting about an 80% chance of at least 25 basis points of easing. Some prominent voices, including Treasury Secretary Scott Bessent, have publicly advocated for a more aggressive 50 basis-point reduction to support what they see as a cooling economy.

Data fuels dovish shift

Thursday's moves came as fresh economic reports showed inflationary pressures continuing to moderate despite ongoing trade tensions. The latest job market indicators also suggested some softening, giving policymakers more room to maneuver. "The Fed's inflation-fighting credentials are established," said one fixed-income strategist who asked not to be named. "Now they can focus on preventing economic weakness."

The yield collapse has been particularly pronounced at the short end of the curve, with the 2-year note - which closely tracks Fed policy expectations - shedding over 700 basis points since its January peak. The rapid repricing reflects growing consensus that the central bank's next move will be decisively dovish.

Political pressures mount

The market moves come amid intensifying White House pressure on the Fed, with President Trump reportedly considering new leadership for the central bank. While Fed officials maintain their independence, the political drumbeat for easier policy adds another layer of uncertainty to the outlook.

Borrowers stand to benefit from the yield drop, with mortgage rates and other consumer credit costs likely to follow Treasuries lower. But the shift squeezes pension funds and retirees dependent on fixed-income returns. One pension fund manager we contacted declined to comment but acknowledged the challenge low yields pose for meeting long-term obligations.

Traders now await Friday's producer price data and jobless claims figures for further clues about the Fed's likely September move. With the 2-year yield's technical breakdown below key support levels, some analysts warn the bond rally may have gotten ahead of itself - but for now, the momentum appears firmly with the bulls.