What’s going on here?
Investors are flocking back to US government debt, causing Treasury yields to dip sharply after a sell-off earlier this month had pushed the 10-year yield to a peak not seen in six months.
What does this mean?
This resurgence in Treasuries reflects markets adjusting to anticipated fiscal changes under President-elect Donald Trump’s administration. The 10-year yield is set for its best showing in two years, with a 60 basis point rise this year driven by inflation expectations from planned tariffs and tax cuts. Apollo Global Management’s chief economist noted a 75 basis point hike in the term premium over the past quarter, indicating concerns over US fiscal sustainability. Meanwhile, declining Federal Reserve reverse repo facility usage and increased T-bill issuance are contributing to fears of next year’s market volatility. The two-year yield, often linked to policy rates, has slightly declined, signaling cautious confidence in possible rate cuts.
Why should I care?
For markets: Yield curve signals potential rate cuts.
The yield curve has steepened, with the gap between two- and 10-year yields at its widest since mid-2022, suggesting traders anticipate interest rate cuts. Futures markets show an 88% chance that the Fed will halt rate cuts in January, predicting about 47 basis points of easing through 2025. These movements mirror investor sentiment and could herald changes in market dynamics as economic policies unfold.
The bigger picture: Fiscal and economic shifts on the horizon.
The pivot back to Treasuries highlights wider concerns about fiscal direction and economic stability following recent sell-offs. The Federal Housing Finance Agency’s report showing a steady rise in home prices, combined with fiscal policy uncertainties, creates a nuanced outlook for 2025. As the US maneuvers through these shifts, global markets could feel the ripple effects, influencing investment strategies and economic forecasts worldwide.
