A look at the day ahead in US and global markets from Mike Dolan
A New Year’s rise in long-term U.S. Treasury yields has worrisomely resurfaced as a long-absent risk premium in debt markets amid fiscal policy and interest rate fears, dragging up government borrowing costs around the world. is becoming
New York Federal Reserve estimates 10-year ‘term premium’ – compensation investors attempt to hold long-term Treasuries to maturity rather than roll over short-term debt holdings Do – topped 50 basis points this week for the first time since 2014
Partly reflecting uncertainty about long-term inflation expectations and credit supply and the U.S. administration’s intent on tax cuts, immigration curbs and tariff hikes, the 30-year Treasury yield on Tuesday fell all the way through 2023. and the 10-year yield reached its highest level. About 9 months.
At about 64bps, the spread of the 2-to-30-year yield curve on Wednesday reached its highest since the Fed began raising interest rates in March 2022. This week’s latest heavy Treasury debt sell-off was triggered by Thursday’s market holiday and higher seasonal corporate bond issuance. In retrospect, $22 billion of 30-year ‘long bonds’ went under the hammer later today.
The more immediate cause for bond market concern – which side-swiped stock markets again on Tuesday – comes from the week’s continued ‘hot’ economic releases – the future as President-elect Donald Trump’s economic policies are parsed. The Fed adds to concerns about rate cuts.
ISM’s December survey of US service sector businesses showed activity picked up in December, while a measure of prices paid for inputs reached near a two-year high.
And in a big week for U.S. labor market updates, data showed job openings rose to 8.098 million in November, beating estimates for an increase of 7.7 million, and up from October’s number of 7.839 million.
ADP’s private sector job reading for the past month and the latest weekly jobless claims data are due later on Wednesday ahead of Friday’s national employment report. Markets and government offices remained closed on Thursday for the funeral of former President Jimmy Carter.
‘very unusual’
Faster growth and inflation readings are pushing back expectations for Fed easing, with futures not seeing another quarter point cut until June and no more this year. It now costs just 38bps of Fed easing for the whole of 2025.
Minutes from the Fed’s latest policy meeting, where policymakers indicated just 50bps of additional rate cuts for this year, are due for release later on Wednesday.
But even with that recalibration, the pace of bond yields — where the 10-year yield has risen 100bps since September as the Fed has cut 100bps over the same period — is “very unusual,” said Torsten Slok, chief economist at Apollo. According to
“The market is telling us something, and it’s very important for investors to look at why long-term rates are going up when the Fed is cutting,” Slok told clients about financial worries, lower bond demand from overseas or an unreasonable Fed. told the deductions. As a possible cause.
Rising Treasury yields, meanwhile, have lifted the dollar anew and boosted long-term borrowing costs in other G7 economies in the slipstream. Most notably on Tuesday, the 30-year British ‘gilt’ yield hit its highest level since 1998.
While 10- and 30-year Treasury yields pulled back a touch early Wednesday, they have held on to much of the week’s sharp gains.
Adding to bond market tensions, oil prices rose again on Wednesday as supplies from Russia and OPEC members tightened while U.S. crude stocks fell last week, market sources said, citing data from the American Petroleum Institute. Weeks had fallen.
At 5%, the year-over-year increase in US crude is the highest since July.
US stock futures recovered some of Tuesday’s heavy tech-led losses earlier today, although Japanese and Chinese markets fell again, along with emerging market indexes down 0.8%.
Chinese stock losses narrowed in late trade there as markets digested Beijing’s latest measures to expand the scope of consumer trade-in. But leading the decline onshore, shares of semiconductor firms fell 0.7% as the US Defense Department reportedly expanded the list of firms that aid Beijing’s military.
Behind the state, uncertainties surrounding the Trump administration’s policies were heightened by the president-elect’s refusal to use military or economic action to acquire the Panama Canal and Greenland, part of a broader expansionist agenda he has championed. After winning the election, it has been extended.
Trump also criticized U.S. spending on Canadian goods and military aid to Canada, saying doing so does not benefit the U.S., and called the border between the two countries an “artificially drawn line.”
The Canadian dollar remained calm, with domestic political gridlock following Canadian Prime Minister Justin Trudeau’s decision to step down as leader of the Liberal Party.
In Europe, stocks seemed to shake off broader global nerves and hit three-week highs. European shares led heavyweight financial stocks on Wednesday and defense firms got a boost after Trump demanded higher spending from NATO allies.
Trump said he believes European members of NATO should spend 5% of their GDP on alliance defense.
Key developments that should provide further direction to US markets later on Wednesday:
* US December ADP Private Sector Payrolls, Weekly Jobless Claims, November Consumer Credit
* The Federal Open Market Committee of the Federal Reserve released the minutes of the latest meeting
* Federal Reserve Board Governor Christopher Waller speaks
* The US Treasury sells $22 billion of 30-year bonds
(By Mike Dolan, Editing by XXXX; mike.dolan@thomsonreuters.com)
