Bonds flashing red, 10-year “term premium”.

A look at the day ahead in the US and global markets by Mike Dolan

Dragging up government borrowing costs around the world, the New Year’s uptick in long-term US Treasury yields is flashing red as a long-absent risk premium in debt markets rebuilds from alarmingly amid fiscal policy and interest rate fears.

The New York Federal Reserve’s estimate of the 10-year “term premium,” seen as the trade-off investors seek for holding long-term Treasuries to maturity rather than rolling over debt holdings at short-term, it broke above 50 basis points this week for the first time. since 2014.

Partly reflecting uncertainty about long-term inflation expectations and debt supply and the incoming US administration’s intent to cut taxes, curb immigration and raise tariffs, the Treasury yield at 30 years hit its highest since 2023 on Tuesday and 10-year yields hit a nearly 9-month high.

At nearly 64 bps, the gap in the 2-year to 30-year yield curve on Wednesday reached its highest since the Fed began raising interest rates in March 2022. With the latest Treasury debt sales d ‘this week advanced due to the Thursday market holiday and the high issuance of seasonal corporate bonds. in the background, $22 billion of 30-year “long bonds” go under the hammer later today.

The most immediate cause of bond market anxiety, which swept stock markets again on Tuesday, comes from the week’s persistently “hot” economic releases, adding to concerns about future Fed rate cuts as the economic policies of President-elect Donald Trump are analyzed.

ISM’s December survey of US service sector firms showed activity accelerated in December, while a measure of prices paid for inputs rose near a two-year high.

And in an important week for U.S. labor market updates, data showed that job postings in November grew to 8.098 million, beating forecasts for an increase of 7.7 million, and more than the October figures of 7.839 million.

Last month’s ADP private sector employment reading and the latest weekly jobless claims figures will be released later Wednesday ahead of Friday’s national jobs report. Markets and government offices are closed Thursday for the funeral of former President Jimmy Carter.

“Very UNUSUAL”

Fast growth and inflation readings are pushing back expectations for Fed easing, with futures not seeing a quarter-point cut until June and no further doubts this year. Now just 38bps of Fed easing is priced in for all of 2025.

Minutes from the Fed’s latest policy meeting, where policymakers indicated just 50bps of additional rate cuts for this year, will be released later on Wednesday.

But even allowing for this recalibration, the move in bond yields, where 10-year yields have risen 100 bps since September as the Fed has cut 100 bps over the same period, is “highly unusual,” according to Apollo Chief Economist Torsten Slok.

“The market is telling us something, and it’s very important for investors to get some insight into why long rates are going up when the Fed is tapering,” Slok told clients, citing fiscal concerns, less demand for U.S. bonds ‘foreign or unwarranted Fed cuts. as possible reasons.

Meanwhile, rising Treasury yields have pushed the dollar back up and also pushed up long-term borrowing costs in other bearish G7 economies. Most notably on Tuesday, UK 30-year gilt yields hit their highest since 1998.

While 10-year and 30-year Treasury yields retreated a touch early Wednesday, they have held on to most of the week’s strong gains.

Adding to bond market tension, oil prices rose again on Wednesday as supplies from Russia and OPEC members tightened while US crude stockpiles fell last week, market sources said, citing data from the American Petroleum Institute.

At 5%, the year-on-year increase in US crude is the highest since July.

US stock futures clawed back a fraction of Tuesday’s heavy tech losses early today, although Japanese and Chinese stocks fell again along with a 0.8% drop of emerging market indices.

Losses in Chinese stocks eased in the afternoon as markets digested Beijing’s latest moves to widen the scope of consumer spending. But leading the decline on the ground, shares of semiconductor companies fell 0.7% as the US Department of Defense expanded the list of companies that allegedly help Beijing’s military.

In Spain, uncertainties about the policies of the Trump administration were increased by the president-elect’s refusal to rule out the use of military or economic actions to pursue the acquisition of the Panama Canal and Greenland, part of a broader expansionist agenda he has promoted since winning the election.

Trump also criticized US spending on Canadian goods and military support for Canada, saying the US does not benefit from doing so, and called the border between the two countries an “artificially drawn line”.

With a domestic political lull following Canadian Prime Minister Justin Trudeau’s decision to step down as leader of the Liberal Party, the Canadian dollar remained calm.

In Europe, stocks appeared to beat broader global nerves and hit three-week highs. European shares advanced on Wednesday, led by heavy financial stocks and as defense companies got a boost after Trump called for higher spending from NATO allies.

Trump said he believes European NATO members should spend 5 percent of their GDP on defense for the alliance.

Key developments that should provide further direction for US markets later Wednesday:

* US December ADP Private Sector Payrolls, Weekly Jobless Claims, November Consumer Credit

* The Federal Open Market Committee of the Federal Reserve publishes the minutes of the last meeting

* Federal Reserve Board Governor Christopher Waller speaks

* The US Treasury sells $22 billion of 30-year bonds

(By Mike Dolan, XXXX edition; [email protected])

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