Bond investors are increasingly positioning for a steeper U.S. Treasury yield curve in 2026 as incoming Kevin Warsh is expected to support interest-rate cuts while pressing for a smaller central-bank balance sheet—an approach that could lift long-term yields even as short-term rates drift lower.
The logic is straightforward: less central-bank reinvestment and fewer bond purchases typically mean more net supply for private investors to absorb, putting upward pressure on longer maturities. “The main outcome of shrinking the balance sheet would be to have a yield curve that is more normally positively sloped as it was historically before all the intervention following the financial crisis,” said Eric Kuby, chief investment officer at North Star Investment Management Corp.
Market pricing already reflects expectations for about two quarter-point rate cuts this year, with the first anticipated around mid-June, while commentary also points to heightened sensitivity around how quickly asset holdings could be reduced. A strategy note published after the nomination described a scenario in which short-term rates fall while long-term yields rise, steepening the curve further if balance-sheet reduction tightens liquidity conditions.
The risk for investors is that the two tools—rate cuts and balance-sheet reduction—can push in opposite directions. “It’s a tough policy to administer. You have one policy that you’re using in a dovish fashion like cutting rates, and then you have another policy that you’re using that leads to higher rates, like shrinking the balance sheet,” said Jim Barnes, director of fixed income at Bryn Mawr Trust. “They’re going in opposite directions. You want to cut rates and shrink the balance sheet at the same time. But how do you put that into action? And that’s where it becomes problematic.”
The curve had already been steepening before the nomination as investors weighed inflation risks and fiscal deficits, with long-term yields elevated relative to the front end. Strategists also expect uncertainty about policy priorities to translate into more rate volatility, especially if messaging shifts between inflation caution and growth support.
For households and companies, the stakes are practical: higher long-end yields flow into mortgage rates, corporate borrowing costs, and discount rates used in equity valuation—creating a tighter financial backdrop even if short-term rates edge down.