(Bloomberg) — The beaten-down US government bond market is looking for a reprieve from Friday’s December employment report.
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While bearish wagers have been growing, the steep rise in yields since mid-September may mean that strong data will hurt the market less than weak data will help it, some investors and strategists say.
Yields near 5% — a threshold the 20-year bond crossed this week for the first time since 2023 — also may overestimate the risk of higher inflation under President-elect Donald Trump, who takes office Jan. 21. Solid demand for Wednesday’s auction of 30-year bonds offering the highest yield in more than a decade suggested investors see value in the market.
“We’ve seen a pretty decent selloff in Treasuries, with it being basically a straight line higher in yields since early December,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “It seems time for the market to take a bit of a breather between now and the presidential inauguration.”
The benchmark 10-year note’s yield briefly topped 4.72% on Wednesday, more than a full percentage point higher since mid-September, when the Federal Reserve did the first of three interest-rate cuts.
The cuts, which totaled a percentage point, were aimed to protect the job market from too-high rates following an increase of more than five percentage points over the previous two years. But combined with the election outcome they’ve rekindled anxiety about inflation. Expectations for additional rate cuts this year have collapsed.
The 10-year has scope to rise to 4.75% if the December jobs data are strong, Rajappa said. To reach 5%, however, will probably take concrete policy action by the incoming administration, she said.
On a higher unemployment rate or soft job-creation figure, however, “you could see a further pullback to lower yields,” Rajappa said. “It will look like the market had got a little ahead of itself in pricing out a lot of Fed rate cuts for this year.”
The median estimate of economists in a Bloomberg survey is for a 165,000 increase in employment in December, a down-shift from 227,000 in November. They see the unemployment rate holding steady at 4.2%.
“The economy is still very resilient,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “And I’m concerned because it looks like inflation is re-accelerating,” she said, adding that she doesn’t think long-term Treasury yields have peaked.
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Resilience in the labor market was a factor when Fed officials in December down-shifted their outlook for the pace of rate cuts this year. Updated quarterly forecasts showed a median prediction of two quarter-point cuts during 2025, compared with four previously.
They also were concerned about stalling progress toward lower inflation, minutes of the December meeting released Wednesday showed. December consumer price data to be released Jan. 15 are forecast to show a third straight month of acceleration.
Swaps traders are pricing in only about 40 basis points of Fed easing for all of 2025.
The central bank’s “recognition of the stickiness of inflation and need for caution in further rate cuts has shocked the market,” said Robert Tipp, chief investment strategist at PGIM Fixed Income. At the same time, “you could have a fast-tracking of extending the tax cuts” along with other forms of fiscal stimulus under Trump.
What Bloomberg Strategists Say
“A chart of the average 10-year Treasury yield move following the first Federal Reserve interest-rate reduction has been going around showing yields tend to move lower following cuts. Yet 1998 was a major exception, suggesting an extension of the recent selloff is possible. Rate options are pricing a high chance of only one more rate cut, plus 30% odds of hikes before year-end .”
— Ira Jersey and Will Hoffman, Bloomberg Intelligence
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Analysts at Goldman Sachs Group Inc. expect lower yields in the wake of the December employment data
“We think Friday’s jobs report could ease some of the recent upward pressure on yields, as we expect a below-consensus 125,000 rise in nonfarm payrolls in December,” a team including Jenny Grimberg wrote in a note. “That said, longer-dated yields may remain relatively high on the back of ongoing investor concerns about the trajectory of US government debt, which we agree appears troubling.”
Holders of long-maturity Treasury debt — who suffered an 8% loss in 2024 as those yields climbed — are down another 2% so far this year, as measured by a Bloomberg index. The broader market gained less than a percentage point last year and is down 0.4% this year.
Recent changes in open interest in 10-year US Treasury note futures suggest that wagers on even higher yields are gaining popularity.
Trump’s threats to impose tariffs and deport illegal immigrants are “negative supply shocks” that the market is factoring in, said Freya Beamish, chief economist at TS Lombard.
“We don’t want to get in the way of the rise in US Treasury yields right now as it could be based upon markets testing a shift to a new regime,” she said Freya Beamish, chief economist at TS Lombard.
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