U.S. Treasury Market: Yields Mixed, Curve Further Steepens
Market Performance: Mixed, 10-Year Yield Rises to 4.62%
On Tuesday (December 24th), the U.S. Treasury market saw mixed results as holiday trading was cut short, leading to generally thin activity. The benchmark 10-year Treasury yield rose approximately 3 basis points to 4.62%, pushing the spread with the 2-year Treasury yield to expand to 28 basis points, nearing its highest level since 2022. Meanwhile, the 2-year Treasury yield decreased by 0.8 basis points to 4.3324%, and the 30-year Treasury yield decreased by 1.2 basis points to 4.7618%.
Despite this, trading volume was only half of the normal level, indicating that investors remained cautious ahead of the holiday. On the same day, the U.S. Treasury issued $70 billion in 5-year Treasury notes, with auction results showing yields slightly below pre-issue trading levels, indicating moderate market demand.
Yield Curve Trends and Market Expectations
As the market's appetite for long-term Treasuries continues to weaken, the yield curve exhibits a further steepening trend. The spread between 5-year and 30-year Treasury yields fell by approximately 1.4 basis points to 32.38 basis points, while the spread between 2-year and 10-year yields increased by about 0.8 basis points to 25.01 basis points. Analysts suggest this change primarily reflects expectations that Trump's policies could drive inflation and fiscal deficits higher.
Tom di Galoma, head of fixed income at Curvature Securities, stated: "The current yield rise stems mainly from concerns in the long end of the market. Investors are uncertain about the policies the new administration might implement and their influence on interest rates."
Federal Reserve Policy and Market Bets
The market predicts that the endpoint of the current Federal Reserve easing cycle will be higher than previously anticipated. Currently, interest rate futures indicate traders expect a rate cut of about 33 basis points by 2025, lower than the median expectation of 50 basis points reflected in the Fed's dot plot. This expectation aligns with market concerns about the potential resurgence of long-term inflation.
Simultaneously, some traders in the options market are betting on the possibility of further yield increases, suggesting lingering fragility in market confidence towards long-term Treasury performance. Di Galoma anticipates that the 10-year yield will find support near 5%, and the 2-10 year yield spread could reach 50 basis points by 2024.
Year-to-Date Performance and Market Outlook
So far this month, U.S. Treasuries have fallen by 1.8%, but their annual gain still stands at 0.3%. This performance is a significant contraction from the 4.6% gain seen before the Fed's rate cut announcement in September. Divergent views on future interest rate policy, combined with concerns over inflation and economic growth, could keep Treasury yields volatile in the coming months.
As the Christmas holiday approaches, market activity is expected to lighten further. On Wednesday (December 25th), the Treasury market will be closed for the holiday, with the Securities Industry and Financial Markets Association recommending an early close on Tuesday. Investors will continue to watch for Federal Reserve policy adjustments and the potential impact of Trump's policies on long-term rates.
