As the New Year unfolds, bond traders are approaching the market with a tempered outlook. This caution stems from a robust US economy coupled with President-elect Donald Trump’s proposed tax cuts and tariffs, which present challenges for Treasuries.
The bond market has been experiencing a downturn, influenced by a surge in positive economic data, the Republican sweep in recent elections, and cautious commentary from Federal Reserve officials. As investors adjust their outlooks for the Fed’s actions, longer-dated bonds have been notably affected, with yields on 10-year Treasuries climbing to nearly 4.6%. This marks a significant rise from when the Fed commenced its monetary easing back in September. In contrast, two-year government bonds have shown more stability, as they’re more closely tied to the Fed’s policy rate and less sensitive to long-term economic projections.
Priya Misra, a portfolio manager at JPMorgan Asset Management, expressed concerns over inflationary pressures from tariffs, fiscal stimulus, and immigration, paired with some optimism for growth thanks to fiscal stimulus and deregulation. This sentiment explains recent interest rate movements.
Starting 2024, many on Wall Street anticipated a successful year for bonds, expecting the Fed to ease interest rates from decades-high levels. However, these predictions were premature. Investors are now wary of wagering on a rally while the economy remains strong. Trump’s tax and tariff initiatives could further stir inflation by boosting fiscal stimulus and driving up import prices, potentially increasing Treasury bond supply due to a larger deficit.
Jack McIntyre, from Brandywine Global Investment Management, advises staying with shorter-maturity notes currently. He notes, "Until there’s clear economic strain, it’s wise to conserve resources, notwithstanding the significant yield rise."
At present, futures traders forecast that the Fed might hold its current policy until around June, with only a modest half-point cut in the benchmark rate expected through 2025.
Bloomberg’s strategists suggest that if Trump acts quickly on his social media announcements, it could trigger a Treasury sell-off. However, they believe any yield increase would be capped, maintaining them under 5%.
This week marks a test for demand with the upcoming Treasury auctions, which were advanced by a day due to a market closure in honor of former President Jimmy Carter. New 10- and 30-year securities will be included in these auctions. Friday will also see the release of the Labor Department’s employment report, predicted to show job growth of 160,000 in December, a drop from the 227,000 added the month prior. JPMorgan’s Misra points out that weaker-than-expected job gains might drive a rebound in bond prices.
“A disappointing report could renew discussions about a Fed rate cut in March,” she explained.
Here’s what to keep an eye on:
Economic Data:
- Jan. 6: S&P Global US services, composite PMI; factory orders; durable and capital goods orders
- Jan. 7: Trade balance; JOLTS job openings; ISM services
- Jan. 8: MBA mortgage applications; ADP employment; consumer credit; initial jobless claims
- Jan. 9: Challenger job cuts; wholesale trade sales and inventories
- Jan. 10: Non-farm payrolls, unemployment rate, and average hourly earnings; University of Michigan consumer sentiment and inflation expectations
Fed Calendar:
- Jan. 6: Fed Governor Lisa Cook
- Jan. 7: Richmond Fed President Thomas Barkin
- Jan. 8: December Federal Open Market Committee meeting minutes; Fed Governor Christopher Waller
- Jan. 9: Philadelphia Fed President Patrick Harker; Richmond Fed President Thomas Barkin; Kansas City Fed President Jeff Schmid; Fed Governor Michelle Bowman
Auction Calendar:
- Jan. 6: 13-, 26-week bills; three-year notes
- Jan. 7: 42-day CMB; 10-year notes
- Jan. 8: 17-week bills, 30-year bonds
- Jan. 9: 4-, 8-week bills
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