A look at the day ahead in the US and global markets from Mike Dolan
With government borrowing costs rising around the world, the rise in long-term US Treasury yields over the new year is flashing red as long-absent risk premiums in debt markets worryingly rebuild amid concerns about fiscal policy and interest rates.
The New York Fed’s estimate of the 10-year “term premium” — seen as the compensation investors seek for holding longer-term Treasuries to maturity rather than extending short-term debt holdings — exceeded 50 basis points this week for the first time. . Since 2014.
Partly due to uncertainty over longer-term inflation expectations, debt supply and the incoming US administration’s intent on tax cuts, immigration restrictions and tariff hikes, the 30-year Treasury yield hit its highest level since 2023 on Tuesday and 10-year bond yields hit a record high. Years highs in nearly 9 months.
At nearly 64 basis points, the two-year to 30-year yield curve gap on Wednesday reached its widest range since the Fed began raising interest rates in March 2022. With the latest heavy Treasury debt sales postponed this week due to Thursday’s market holiday and rising… Seasonal Corporate Bond Issuance In the backdrop, $22 billion of 30-year “long-term bonds” will go under the hammer later today.
The most pressing cause for bond market anxiety — which swept stock markets again on Tuesday — comes from this week’s continuing “hot” economic releases — heightening concern about future interest rate cuts from the Federal Reserve while analyzing the economic policies of President-elect Donald Trump.
The December ISM survey of US service sector companies showed activity accelerated in December, while a measure of prices paid for inputs rose to its highest level in nearly two years.
In a big week for job market updates in the United States, data showed that job openings in November rose to 8.098 million, exceeding expectations for a rise of 7.7 million, and higher than October numbers of 7.839 million.
ADP’s private sector jobs reading for last month and the latest weekly unemployment claims numbers are due later Wednesday ahead of Friday’s national employment report. Markets and government offices are closed on Thursday to attend the funeral of former President Jimmy Carter.
“Very unusual”
Rapid growth and inflation readings are dampening expectations for Fed easing, with futures not seeing another quarter-point cut until June and questioning more of that this year. Only 38 basis points of Fed easing for all of 2025 is now priced in.
Minutes from the Federal Reserve’s latest policy meeting, where policymakers signaled additional interest rate cuts of just 50 basis points for this year, are due later on Wednesday.
But even in light of this recalibration, the movement in bond yields — 10-year yields have risen 100 basis points since September, with the Fed cutting 100 basis points over the same period — is “highly unusual,” according to the company’s chief economist. Apollo, Torsten Slok.
“The market is telling us something, and it is very important for investors to have a view on why long-term interest rates rise when the Fed cuts,” Slok told clients, assuming financial concerns, lower demand for bonds from abroad or Fed cuts. Unjustified Fed. As possible causes.
At the same time, rising Treasury yields have pushed the dollar higher again, and also increased long-term borrowing costs in other declining G7 economies. Most notably on Tuesday, UK 30-year bond yields reached their highest levels since 1998.
While 10- and 30-year Treasury yields fell slightly early Wednesday, they held on to the bulk of the week’s sharp rise.
Market sources, citing American Petroleum Institute figures, said that adding to the tension in the bond market, oil prices rose again on Wednesday as supplies from Russia and OPEC members decreased, while US crude oil inventories fell last week.
At 5%, the rise in US crude oil prices on an annual basis is the highest since July.
US stock futures recovered some of Tuesday’s heavy losses due to technology early in the day, although Japanese and Chinese stock exchanges fell again along with emerging market indexes falling 0.8%.
Losses in Chinese stocks narrowed in late trading there as markets digested Beijing’s latest measures to expand consumer trade. But leading to the decline at home, shares of semiconductor companies fell 0.7% as the US Department of Defense expanded the list of companies allegedly helping Beijing’s military.
Back in the United States, doubts about the Trump administration’s policies have been exacerbated by the president-elect’s refusal to rule out the use of military or economic action to pursue the acquisition of the Panama Canal and Greenland, part of a broader expansionist agenda he has promoted since his election victory.
Trump also criticized US spending on Canadian goods and military support for Canada, saying the United States reaps no benefits from doing so, and calling the border between the two countries an “artificially drawn line.”
With the domestic political divide following Canadian Prime Minister Justin Trudeau’s decision to step down as leader of the Liberal Party, the Canadian dollar remained calm.
In Europe, stocks appeared to buck broader global nerves and hit three-week highs. European shares rose on Wednesday, led by financial heavyweights and with defense companies getting a boost after Trump called on NATO member states to increase spending.
Trump said he believes NATO’s European members should spend 5% of their gross domestic product on defending the alliance.
Key developments that should provide further guidance to US markets later on Wednesday:
* ADP December US private sector payrolls, weekly jobless claims, and November consumer credit
* The Federal Reserve’s Federal Open Market Committee releases minutes of its latest meeting
* Federal Reserve Governor Christopher Waller speaks
* The US Treasury sells $22 billion in 30-year bonds
