Treasuries were mixed in thin trading as traders absorbed the prospect of a less aggressive path ahead for Federal Reserve interest-rate cuts and priced in greater risk for US long-term debt.
Benchmark 10-year yields traded little changed at roughly 4.6%, while two-year rates edged lower. The result is that the yield premium on the longer maturity widened to above 27 basis points — holding close to the largest gap since 2022. Thirty-year Treasury yields have plowed higher, with the rate at 4.78% Friday, near the highs for this year set in April.
Investors have been demanding additional yield compensation, or term premium, for long-term Treasuries amid signs of sticky inflation and as they anticipate that President-elect Donald Trump’s agenda will likely boost the federal budget deficit and swell the US debt load. A New York Fed measure of the term premium on Treasuries this week rose to the highest since October 2023.
“US 10-year yields are rising and the forward markets are pricing continued increases over the next several years,” said Ben Emons, founder of FedWatch Advisors. “And Treasury term premium is now rising quicker than yields, which is notable because if investors demand more bond term premium, it shows an added compensation beyond just for inflation and the Fed outlook.”
Ten-year yields may test or move to over 4.75%, a level last seen in 2023, Emons said
Swaps traders are pricing in 0.37 percentage point of Fed rate cuts by the end of next year, or less than the two-quarter-point reductions that officials signaled in their update this month to their quarterly projections.
Two-year Treasury yields declined about a basis point to 4.32% on Friday. Investors’ penchant for shorter- to medium -term debt was evident this week as demand was solid for the US Treasury’s sales of two-, five- and seven-year notes.
In a typical dynamic ahead of year-end, key benchmarks tied to US overnight funding climbed amid volatility in repo markets. The Secured Overnight Financing Rate rose to 4.53% as of Dec. 26 from 4.40%, according to New York Fed data published Friday.
Outside the US, the yield on 10-year German bonds rose as much as eight basis points to 2.40% as trading resumed after the Christmas holiday, touching the highest since November.
The moves come amid “really thin markets,” said Jordan Rochester, the head of macro strategy in EMEA for Mizuho.
Rochester also pointed to rising natural gas prices as a possible factor denting demand. Russian President Vladimir Putin cast further doubt on the likelihood of a deal to maintain flows to Europe via Ukraine, lifting futures contracts
If that feeds through to higher inflation it could strain the European Central Bank’s ability to lower interest rates, Rochester said.
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