As the Christmas holiday approaches, the US bond market this week is seeing trading split into two parts. However, in the limited trading hours before the holiday, US bond bulls still see no signs of easing selling pressure. Since early December, US bond yields have continued to rise, particularly long-term bonds have been notably pressured, with the 10-year yield reaching its highest point in seven months and the yield curve gradually steepening.
Long-term Yields Climb, Yield Curve Steepens
By Monday's close in New York, yields on US Treasuries of various maturities rose across the board. The 2-year Treasury yield rose by 3 basis points to 4.351%, the 5-year yield increased by 5.5 basis points to 4.44%, the 10-year yield rose by 6.5 basis points to 4.592%, and the 30-year yield climbed 5.8 basis points to 4.78%. The yield spread between the 10-year and 2-year Treasuries widened to about 25 basis points, higher than near parity earlier this month.
In contrast, in late June this year, the 2-year yield was 51 basis points higher than the 10-year yield, indicating a significant inversion. Analysts point out that the recent pressure on long-term bonds is mainly due to market expectations of a slowdown in the Fed's pace of interest rate cuts and concerns about a potential deterioration in the US fiscal situation.
Traders expect that the Federal Reserve's rate cuts next year will be less than the previously forecasted 50 basis points, with interest rate swap contracts reflecting a decrease of only 34 basis points, close to a single rate cut. This expectation has limited bond demand, further pushing up long-term yields.
Holiday Affects Market Activity
US Treasury trading this week is significantly affected by the Christmas holiday, with market activity becoming subdued. Many traders have already left early, reducing trading volume. Meanwhile, the absence of important economic data before the holiday and the quiet stance of Fed officials have further decreased market guidance.
It is noteworthy that the US stock and bond markets will close early today. Stock trading will end at 1 PM New York time (2 AM Wednesday Beijing time), and bond trading will close an hour later. Both markets will resume trading on Thursday, when the focus will be on the release of more economic data, such as initial jobless claims.
Future Outlook: Yield Curve Adjustment May Continue
In recent months, the anomalous rise in long-term yields has caught market attention. Analysts indicate that investors' increasing expectations of future risk premiums and potentially escalating debt issuance pressures are pushing long-term bonds under stress. Despite the consumer confidence index released on Monday being lower than expected and strong demand for the two-year Treasury auction, the overall US bond market has not yet shaken off selling pressure.
After the holiday, the market's focus will shift to the release of more economic data, including initial jobless claims and the revised durable goods orders, which may provide new trading clues for the bond market. Before that, the pressure for yield curve adjustments is expected to persist, and the risk premium of long-term bonds will remain a key factor influencing the market.
