The beleaguered US government bond market is looking for some relief with the December employment report scheduled for release on Friday.
Despite a rise in bearish positions, many investors and strategists contend that the significant jump in yields since mid-September suggests that strong economic data may be less harmful to the market compared to the positive impact of weak data.
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As yields near the 5% mark—the threshold the 20-year bond crossed this week for the first time since 2023—it might be that concerns about elevated inflation under President-elect Donald Trump, who will assume office on January 21, are exaggerated. The strong interest shown in Wednesday’s auction of 30-year bonds, which presented the highest yields in over ten years, indicates that investors still find value in this market.
“We’ve seen a significant sell-off in Treasuries, with yields rising almost continuously since early December,” noted Subadra Rajappa, head of US rates strategy at Societe Generale. “It seems like the market could benefit from a brief pause before the presidential inauguration.”
The yield on the benchmark 10-year note briefly climbed above 4.72% on Wednesday, reflecting an increase of more than one full percentage point since mid-September, when the Federal Reserve initiated its first of three interest-rate cuts. A Bloomberg index that tracks Treasury returns has fallen by 0.4% thus far in the year.
The cuts were aimed at protecting the job market against excessively high rates after an over five percentage point increase in the preceding two years. However, in light of the election results, these cuts have resurrected worries about inflation, resulting in diminished expectations for further rate reductions this year.
Rajappa suggested that if the December jobs data is strong, the 10-year yield could rise to 4.75%. However, hitting the 5% mark would likely require decisive policy actions from the new administration.
Conversely, should the unemployment rate rise or job creation numbers fall short, “you might see a further drop in yields,” Rajappa added. “It may seem that the market has prematurely discounted many of the Fed’s anticipated rate cuts for this year.”
A Bloomberg survey shows an average estimate of a 165,000 increase in jobs for December, down from 227,000 in November, with expectations of the unemployment rate holding steady at 4.2%.
“The economy remains quite resilient,” asserted Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “However, I am worried, as inflation appears to be picking up again,” she remarked, expressing her view that long-term Treasury yields may not have yet reached their peak.
The strength of the labor market contributed to the Federal Reserve’s decision to revise its outlook regarding the pace of rate cuts this year in December. The latest quarterly forecasts pointed to a median expectation of two quarter-point reductions in 2025, which is down from the previously anticipated four.
Concerns regarding slow progress toward lower inflation were emphasized in the minutes from the December meeting made public on Wednesday. The consumer price data expected to be released on January 15 is anticipated to show a third consecutive month of acceleration.
Swaps traders are currently predicting only around 40 basis points of easing from the Fed for all of 2025.
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The central bank’s recognition of ongoing inflation challenges and the necessity for caution related to future rate cuts has taken the market by surprise, commented Robert Tipp, chief investment strategist at PGIM Fixed Income. Simultaneously, “there could be a quickening of efforts to extend tax cuts” alongside other fiscal stimulus initiatives under Trump.
What Bloomberg Strategists Say
“A chart displaying the average yield movement of 10-year Treasuries after the first Fed interest-rate cut has circulated, illustrating that yields usually decline post-cuts. Nevertheless, 1998 is noted as a remarkable exception, indicating that a continuation of the recent sell-off is possible. Rate options suggest a high likelihood of only one more rate cut, with a 30% chance of hikes before the year concludes.”
— Ira Jersey and Will Hoffman, Bloomberg Intelligence
Analysts from Goldman Sachs Group Inc. anticipate lower yields after the December employment report.
“We believe Friday’s jobs report could ease some of the recent upward pressures on yields, as we expect an increase of 125,000 in nonfarm payrolls for December, which falls short of consensus predictions,” a team including Jenny Grimberg noted in their assessment. “Nonetheless, longer-dated yields may remain relatively high, given continued investor concerns regarding the outlook for US government debt, which we regard as worrisome.”
Investors holding long-dated Treasury bonds—who faced an 8% loss in 2024 due to rising yields—have endured an additional 2% loss so far this year, as shown by a Bloomberg index. The broader market recorded less than a one percentage point gain last year and is down 0.4% thus far this year.
Recent changes in open interest for 10-year US Treasury note futures suggest a growing interest in betting on even higher yields.
Trump’s proposed tariffs and plans to deport undocumented immigrants are being perceived as “negative supply shocks” that the market is currently factoring in, noted Freya Beamish, chief economist at TS Lombard.
“We prefer not to intervene in the ongoing rise of US Treasury yields, as it may signify the market’s transition to a new regime,” she observed.
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