Market Volatility: Investors Shy Away from Long-Term US Government Debt
As the holiday season approaches, investors are growing increasingly cautious about investing in long-term US government debt, leading to a surge in yields on Tuesday. This trend is largely driven by concerns over the potential impact of President-elect Donald Trump’s agenda on the economy and the fiscal landscape.
Rising Rate Environment
The benchmark 10-year yield has risen to 4.62%, up 3 basis points, with the gap to two-year securities widening to 28 basis points, close to its steepest since 2022. According to Tom di Galoma, head of fixed income at Curvature Securities, “We are in a rising rate environment now, and it’s really all coming from the longer end.” Di Galoma predicts that the 10-year yield will continue to move upward, potentially reaching 5% next year.
Federal Reserve’s Easing Cycle
The Federal Reserve’s decision to end its current easing cycle at a higher level than previously expected has also contributed to the uncertainty surrounding long-term debt. Furthermore, options traders are betting on yields moving further upward, indicating a lack of confidence in the market.
US Treasury Market Performance
The US Treasury market has lost 1.8% this month, trimming this year’s gains to just 0.3%. In contrast, the market was up around 4.6% this year through September 17, before the Fed began its rate-cutting cycle. Last year, Treasuries gained 4.1%, after posting losses of 12.5% in 2022 and 2.3% in 2021.
Auction Results and Market Uncertainty
Despite good demand for coupon-bearing debt supply, Treasuries remained lower on Tuesday. The US Treasury sold $70 billion of five-year notes, following a solid auction of 2-year securities on Monday. However, uncertainty surrounding Trump’s policies and their potential impact on the economy is keeping investors cautious. As Julian Potenza, portfolio manager at Fidelity Investments, notes, “There’s a lot of uncertainty, kind of uncertainty upon uncertainty. Respecting that, we’re not taking any big active bets relative to benchmark right now.”
Fed Rate Projections and Market Expectations
Swaps traders are pricing in just about 0.33 percentage points of Fed cuts in 2025, less than the two quarter-point cuts signaled by Fed officials. This uncertainty is likely to continue to influence market trends in the coming year.
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