Global Markets on High Alert as Treasury Yields Surge
A perfect storm of fiscal policy fears, interest rate uncertainty, and robust economic data has sent long-term U.S. Treasury yields soaring, sparking anxiety in debt markets worldwide. The New York Federal Reserve’s estimate of the 10-year ‘term premium’ has topped 50 basis points for the first time since 2014, indicating a significant increase in the risk premium investors demand for holding long-term Treasuries.
Economic Data Fuels Bond Market Jitters
The latest economic releases have added fuel to the fire, with ISM’s December survey of U.S. services sector businesses showing accelerated activity and a surge in prices paid for inputs. Job openings in November grew to 8.098 million, exceeding forecasts, and ADP’s private sector job reading for last month is expected to provide further insight into the labor market.
Fed Easing Expectations Take a Hit
The brisk growth and inflation readouts have pushed back expectations for Fed easing, with futures now pricing in only 38bps of easing for the whole of 2025. Minutes from the Fed’s latest policy meeting, due for release later today, will provide further guidance on the central bank’s thinking.
Bond Yields Defy Fed Cuts
The movement of bond yields, which have risen 100bps since September despite the Fed’s 100bps of rate cuts over the same period, has been described as “highly unusual” by Apollo Chief Economist Torsten Slok. The market is signaling that something is amiss, and investors need to have a view on why long rates are rising when the Fed is cutting.
Global Impact
Rising Treasury yields have lifted the dollar and boosted long-term borrowing costs in other G7 economies. In the UK, 30-year ‘gilt’ yields hit their highest since 1998 on Tuesday. Oil prices have also risen, driven by tightening supplies from Russia and OPEC members, adding to the bond market tension.
Stock Markets React
U.S. stock futures recovered some of Tuesday’s losses early today, but Japanese and Chinese bourses fell again alongside a 0.8% drop in emerging markets indexes. European shares, however, advanced to three-week highs, led by financial stocks and defense firms.
Key Events to Watch
Later today, investors will be watching the release of US December ADP private sector payrolls, weekly jobless claims, and November consumer credit data. The Federal Reserve’s Federal Open Market Committee will also release minutes of its latest meeting, and Federal Reserve Board Governor Christopher Waller is set to speak. The US Treasury will sell $22 billion of 30-year bonds, which could provide further direction to markets.
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