It's been a brutal start to the year for the bond market
Reuters
- The US bond market has been free-fall to start 2025.
- Treasury yields hit their highest level since October 2023 on Friday after a strong jobs report.
- The move has been driven by dimmed rate-cut views and worries about inflationary Trump policies.
The US bond market is off to a tough start in 2025.
This has been reflected in spiking yields, which trade inverse to the price of bonds. On Friday, US Treasury yields surged to their highest level since October 2023, inching closer to a key threshold that has historically triggered a sell-off in stocks.
The yield on the US 10-year note has climbed 16 basis points just this week, following a 69-basis-point move in 2024. The 10-year yield has edged up consistently since the Fed began cutting rates in September, diverging from the federal funds rate as bond markets predict higher rates in the face of stubborn inflation.
Friday's surge came after a blowout December jobs report, which showed 256,000 jobs were added to the economy last month, compared to economist estimates of 155,000.
But the jobs report was just the latest catalyst responsible for pushing yields higher. In addition to speculation that the economy still hot after two years of rate hikes from the Federal Reserve, investors are also concerned that Donald Trump's proposed policies will stoke a rebound in inflation. Such a situation would then, in turn, potentially necessitate further rate increases.
A correlation shift
While strong economic data is typically good news for the stock market, that's not the case when it limits the Fed's ability to cut interest rates.
"With the 10-yr firmly above 4.5%, we believe the market is shifting into a 'good news is bad news' environment again," Ohsung Kwon, a strategist at Bank of America, said in a recent note.
Analysts at Goldman Sachs also noted the correlation change between the stock market and bond yields.
"Equity/bond yield correlations have turned negative again," Goldman's Christian Mueller-Glissmann wrote in a note this week, adding that stock prices have further room to fall if yields move higher.
After this week's strong economic data, the expected Fed interest-rate cuts in 2025 dipped to one cut from two. Just a few weeks ago, the market was expecting three or four cuts this year.
The final piece of the puzzle that has kept yield elevated is Trump's economic and legislative proposals, which investors fear will catalyze a fresh bout of inflation.
Trump has threatened wide-ranging tariffs against both allies and adversaries and has proposed "one big, beautiful bill" that would enact his agenda, including tax cuts.
On Wednesday, CNN reported that Trump was considering using emergency powers to enact his tariff plans. Stocks slipped and yields edged up early in Wednesday's trading session.
Furthermore, the combination of tax cuts and high government spending could fuel a bigger deficit, which would also put upward pressure on Treasury yields.
Investors' anticipation of further fiscal spending under a Trump administration could be part of the reason Treasury yields have surged by 100 basis points. In comparison, the Fed has cut interest rates by 100 basis points.
"This is highly unusual," Torsten Slok, an economist at Apollo, said in a note on Tuesday. "The market is telling us something, and it is very important for investors to have a view on why long rates are going up when the Fed is cutting."
From a technical perspective, Katie Stockton of Fairlead Strategies said the 10-year Treasury yield was bumping up against resistance at 4.7% and 5%.
"There are signs of short-term upside exhaustion, but they would be minimized by a decisive breakout," Stockton said in a note on Wednesday.