U.S. bond yields experienced a significant decline last week, with market expectations stabilizing at 4.4% by the end of the year. Investors may focus on opportunities for market corrections.
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The U.S. bond market saw yields rise sharply by the end of December last year due to strong economic data, surpassing 5% at one point. However, last week, the core CPI annual growth rate in the U.S. fell to 3.2%, marking the first decline in six months and prompting a significant decrease in U.S. bond yields, with the 10-year bond yield recording its largest drop in over seven weeks.
According to end-of-day data from the New York bond market on January 17:
The 2-year Treasury yield rose by 3.6 basis points to 4.272%, down 12.2 basis points for the week.
The 10-year Treasury yield slightly increased by 0.4 basis points to 4.610%, down 16.1 basis points for the week.
The 30-year Treasury yield edged up by 0.1 basis points to 4.845%, down 11.7 basis points for the week.
Market data indicates that this is the largest single-week drop in yields for all three major bond terms since late November last year. The market generally believes that the December CPI data falling below expectations has reduced the likelihood of further interest rate hikes by the Federal Reserve, thereby driving yields down.
Trump’s Policies as a Key Variable
As the Trump administration is set to take office, its fiscal policies may have profound implications for bond market trends. Michael Hartnett, Chief Investment Strategist at Bank of America, pointed out that the size of the U.S. government has reached $7.3 trillion, making it the third-largest economy in the world. Over the past five years, U.S. economic growth has largely depended on the expansion of government spending, but such growth momentum may be difficult to sustain.
Hartnett noted that the rolling 10-year return on 10-year U.S. Treasuries has dipped below -0.5% for the first time in nearly 90 years, a rare negative value. In contrast, the long-term return on U.S. stocks during the same period is 13.1%, commodities at 4.5%, and Treasury bills at 1.8%, indicating a declining attractiveness of U.S. Treasuries compared to other assets.
Yield Forecast: Expected to Close at 4.4% by Year-End
Market predictions for year-end yields are being adjusted upward. Economists analyze that the 10-year Treasury yield may close at 4.4% by the end of this year, higher than the 3.7% forecast from last October. Additionally, the estimated median for the federal funds rate has also increased from 3.3% to 3.89%.
Investment institutions indicate that the 10-year yield has recently approached 4.8%, yet it has not surpassed the post-pandemic historical high of 4.99%. The likelihood of further interest rate hikes is diminishing, providing a favorable environment for investors to position themselves in bonds.
Famous Short Seller Takes Profit
Wall Street investor Mark Dowding has recently stopped shorting U.S. Treasuries and chose to take profits as the 30-year yield approached 5%. He stated:
“The 30-year yield has reached 5%, and such rates are indeed quite high.”
“Current yields have reached a peak, with little likelihood of further increases in the short term.”
Other analysts also noted that the probability of yields exceeding 5% is extremely low, and the tension in the bond market is gradually easing.
