U.S. Treasury yields experienced a significant decline last week, with the market expecting stabilization at 4.4% by the end of the year. Investors may wish to focus on opportunities for repositioning after the market correction.
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The U.S. bond market saw yields rise above 5% at the end of December last year due to strong economic data. However, last week, the annual growth rate of the U.S. core CPI dropped to 3.2%, marking the first decline in six months and prompting a significant retreat in Treasury yields, with the 10-year yield posting its largest drop in over seven weeks.
As of January 17, based on end-of-day data from the New York bond market:
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 edged up by 0.4 basis points to 4.610%, down 16.1 basis points for the week.
The 30-year Treasury yield slightly increased by 0.1 basis points to 4.845%, with a weekly decline of 11.7 basis points.
Market data indicate that this is the largest weekly decline in the yields of the three major Treasury maturities since the end of November last year. The market generally believes that the December CPI data falling below expectations reduced the likelihood of further rate hikes by the Federal Reserve, thereby driving yields lower.
Trump’s Policies as a Key Variable
With the Trump administration set to take office, its fiscal policies could have a profound impact on the bond market’s trajectory.
Michael Hartnett, Chief Investment Analyst at Bank of America, pointed out that the size of the U.S. government has reached $7.3 trillion, equivalent to the world’s third-largest economy. 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 for the first time in nearly 90 years, the 10-year rolling return on U.S. Treasuries has fallen to -0.5%, a rare negative value. In comparison, during the same period, the long-term return on U.S. equities was 13.1%, commodities were 4.5%, and Treasury bills were 1.8%, indicating that the attractiveness of U.S. Treasuries is declining relative to other assets.
Yield Forecast: Expected to Reach 4.4% by Year-End
Market expectations for year-end yields are being revised upwards. Economists analyze that the 10-year Treasury yield could close at 4.4% by the end of this year, higher than the 3.7% forecast from October last year. Additionally, the projected midpoint of the federal funds rate has also been raised from 3.3% to 3.89%.
Investment firms have indicated that the 10-year yield is currently close to 4.8%, but has yet to break through the post-pandemic historical high of 4.99%. The likelihood of further rate hikes is decreasing, and the current interest rate environment provides a favorable opportunity for investors to position themselves in bonds.
Notable Short Seller Takes Profits
Wall Street investor Mark Dowding has recently ceased shorting U.S. Treasuries and chose to take profits when the 30-year yield approached 5%. He stated:
“The 30-year yield has reached 5%, which is indeed quite high.”
“Current yields have peaked, and there is little chance of further increases in the short term.”
Other analysts have also pointed out that the likelihood of yields breaking through 5% is extremely low, and tension in the bond market is gradually easing.
