Short-dated U.S. government bond yields fell sharply on Wednesday, sending the 2-year note down to 3.6540%, its lowest level since 1 May. The real yield on the benchmark slipped below 60 basis points, the weakest in roughly three years, as traders increased wagers that the Federal Reserve will begin cutting rates in coming months. The decline at the front end outpaced moves further out the curve, pushing the 2-year/30-year spread to about 130 basis points, the widest since January 2022. The more closely watched 2-year/10-year gap also steepened to its highest level since late April. The 10-year yield hovered near 4.26%, down more than half a percentage point from its January peak. Steepening came despite a pickup in inflation expectations. The Conference Board’s consumer-confidence survey showed one-year inflation expectations rising to 6.2% in August, while the five-year breakeven rate edged above 2.5%. In derivatives markets, the two-year inflation swap rate reached its highest since November 2022. Investors interpret the combination of falling short-term yields and firmer inflation expectations as pointing to near-term policy easing followed by a potential reflationary phase.