The 20-year Treasury bond offered a grim warning as a selloff fueled by inflationary angst gripped global debt markets: 5% yields are already here.
The 20-year yield, a laggard on the US government debt curve since its re-introduction in 2020, topped 5% Wednesday for the first time since 2023. The move, fueled in part by concern that President-elect Donald Trump’s policies will rekindle price pressures and lead to wider deficits, may indicate what’s next in the $28 trillion Treasury market.
The 30-year yield topped 4.96%, while the 10-year rose as much as four basis points to nearly 4.73% — just shy of its highest level since November 2023.
“The US market is having an outsized effect as investors grapple with sticky inflation, robust growth and the hyper-uncertainty of incoming President Trump’s agenda,” said James Athey, a portfolio manager at Marlborough Investment Management.
Treasury yields have been climbing since the Federal Reserve in September kicked off its interest-rate cutting cycle with an outsized half-point move. A resilient US economy and Trump’s White House victory less than two months later fueled the moves further, leaving the 10-year yield more than 100 basis points higher than it was before the Fed’s debut rate reduction.
All that has forced bond investors to contend with the possibility that the benchmark yield could soon return to 5% — a level that has been breached only a handful of times over the past decade, most recently in late 2023.
The 20-year bond yield, though an outlier on the curve because it’s a relatively new tenor, is subject to the same pressures as the others. Yields retreated slightly from the day’s highs after the ADP gauge of private-sector hiring was weaker than anticipated for December.
New Era
From Amundi SA and Citi Wealth to ING, firms are increasingly acknowledging a new era of higher yields, and options traders are targeting the 5% level. It’s a rude awakening for a market that had broadly expected yields to fall as central banks pivoted from aggressive rate hikes to cuts.
“Treasury yields at 5% is definitely on the cards,” said Lilian Chovin, head of asset allocation at Coutts. “There’s a risk premium, a term premium going on with the very large fiscal deficits.”
For the Fed, higher yields raise the stakes as policymakers — who’ve cut borrowing costs three times this cycle — aim to get inflation under control without triggering a downturn of the economy. Fed projections updated last month showed the median policymaker expects two additional cuts in 2025.
Fed Governor Christopher Waller on Wednesday said he believes inflation will continue to cool toward the central bank’s 2% target, offering support for additional cuts this year.
Traders, meanwhile, are pricing in a cumulative 36 basis points of easing this year — implying no more than one quarter-point reduction. The first such move isn’t fully priced in until July.
That puts bond investors on high alert ahead of readings of the US labor market on Friday and consumer price inflation next Wednesday.
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