Treasuries were under pressure in a holiday-shortened session as investors remain wary to park cash in US government debt that matures in a decade or more.
Yields on long-term debt led moves higher Tuesday, adding to a steepening trend in the curve that has dominated trading in the market. Benchmark 10-year yields traded at 4.62%, up about 3 basis points, with the gap to two-year securities widening as much as 28 basis points, close to its steepest since 2022. Bonds are trading in an abridged US session, with trading volumes about 50% of normal.
Prospects that the Federal Reserve will end its current easing cycle at a higher level than previously expected and that President-elect Donald Trump’s agenda may spark growth and inflation as well as potentially worsen the US fiscal backdrop has weighed on long-term debt. Options traders’ are biasing wagers to those that will profit if yields move further upward.
“We are in a rising rate now environment and it’s really all coming from the longer end,” said Tom di Galoma, head of fixed income at Curvature Securities. “There’s a lot of concern about what the next administration will be doing and how it impacts where rates go. There could even be some talk in 2025 of the Fed needing to raise rates,” if inflation rebounds sharply.
The 10-year yield should keep moving upward to the next support at around the 5% level, with the two-to-10-year curve spread likely to reach 50 basis points sometime next year, di Galoma said.
The US Treasury market lost 1.8% this month, trimming this year’s gains to just 0.3%, according to a Bloomberg index as of through Dec. 23. The complex was up around 4.6% this year through Sept. 17, the day before the Fed began its rate-cutting cycle by shaving its policy benchmark down a half a percentage point. Last year, Treasuries gained 4.1%, after posting losses of 12.5% in 2022 and 2.3% in 2021.
Treasuries remained lower after a second round of coupon-bearing debt supply received good demand. The US Treasury sold $70 billion of five-year notes Tuesday after its auction on Monday of 2-year securities was met with solid demand. On Thursday, the Treasury will sell $44 billion seven-year notes on Thursday.
The Securities Industry and Financial Markets Association recommend an early close for cash bond market Tuesday at 2 p.m. New York, ahead of the Christmas day holiday on Wednesday.
Swaps traders are pricing in just about 0.33 percentage points of Fed cuts in 2025, thus less than the two quarter-point cuts signaled from Fed officials in their latest quarterly rate projections.
Read more: Fed’s Dec. Dot Plot of Fed Funds Rate Forecasts
Keeping some investors wary of taking big wagers now is that even as Republicans’ control both the US House and Senate, they have a small majority in both so it’s unclear how much of Trump’s plans will actually get enacted.
“There’s are a lot of possible paths that this could take next year with regard to which policies might be implemented and then how they might impact the economy,” said Julian Potenza, portfolio manager at Fidelity Investments, which manages $15 trillion in assets. “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. So our duration and curve positions are pretty close to home.”
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