DoubleLine Capital's global sovereign debt portfolio manager Bill Campbell indicated that if the Federal Reserve implements aggressive rate cuts, the U.S. yield curve will steepen further. Campbell expects that accommodative monetary policy will encourage risk-taking behavior in credit markets but will do little to push up long-term yields, potentially extending the period during which risk assets trade at elevated valuations.

Currently, the U.S. 2-year Treasury yield is near its lowest level since 2022, while the 10-year Treasury yield sits at a five-month low, driven by market expectations of declining interest rates. Campbell stated: "This could potentially keep risk assets and credit assets trading at extremely high levels. The most obvious manifestations of these issues may be a weaker dollar and a steepening yield curve."

Long-term U.S. Treasuries have performed extremely poorly this year, causing spreads across the yield curve to reach multi-year highs. The current yield difference between 2-year and 10-year U.S. Treasuries stands at approximately 58 basis points, compared to just 20 basis points at the end of February. Campbell believes this differential could expand by another 75 to 100 basis points throughout the market cycle, as investors expect the Fed to be more tolerant of inflation and more inclined toward policy easing when faced with increasing debt supply. This would match the nearly 158 basis point spread seen in March 2021.

Last Friday's disappointing U.S. non-farm payroll data has strengthened conviction that the Fed will need to act quickly to support the labor market, leading traders to price in nearly three rate cuts this year. Policymakers will make their next rate decision on September 17.

Beyond labor market pressures pushing the Fed toward faster action, the U.S. government faces a substantial burden of maturing debt in the coming years, borrowed when rates were lower. Campbell wrote in a Monday report that over $3.4 trillion in U.S. Treasuries will mature next year, with an average rate of 2.78%, well below the current 2-year yield of 3.5% or 10-year yield of 4.07%. If the Treasury refinances maturing debt at current 2-year rates, taxpayers would bear over $25 billion in additional annual interest costs.

This represents just one pressing issue. The total amount of publicly traded U.S. Treasuries is approximately $29 trillion, most of which was issued when rates were lower. As these debts mature, the Treasury has indicated it will issue more short-term bonds to avoid locking in 4% rates for decades to come. This will only make U.S. borrowing costs more closely tied to Fed policy.

Fiscal deficits and rising long-term funding costs are pressuring countries worldwide. France serves as a prime example, with current Prime Minister François Bayrou facing a confidence vote this Monday that could likely lead to his removal. Japan faces similar circumstances.

Treasury Secretary Scott Bessent has discussed the goal of lowering 10-year Treasury yields, which would help Americans more easily obtain mortgages or car loans. Campbell considers this a challenging task, stating: "For 10-year bonds, bringing yields down to 3% would be quite difficult."