(Bloomberg) — Treasury bonds came under pressure during a shortened holiday season as investors remain wary of parking cash in U.S. Treasury bonds maturing in a decade or more.
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Long-term debt yields led higher moves on Tuesday, contributing to a steepening trend in the curve that has dominated market trading. Benchmark 10-year yields traded at 4.62%, about 3 basis points higher, widening the spread over two-year securities by as much as 28 basis points, nearly the steepest since 2022. Bonds trade in a shortened U.S. session, with trading volumes about 50% of normal.
Prospects that the Federal Reserve will end the current easing cycle at a higher level than previously expected and that President-elect Donald Trump’s agenda could boost growth and inflation and possibly also worsen the US fiscal environment have weighed on long-term debt . Options traders are focusing their bets on those who will benefit if yields continue to rise.
“We are now in a rising interest rate environment and it really all comes from the longer end,” said Tom di Galoma, head of fixed income at Curvature Securities. “There is a lot of concern about what the next government will do and what impact this will have on share price developments. There could even be talk of the need for a Fed rate hike in 2025 if inflation rebounds sharply.
Ten-year yields should continue to rise towards the next support around the 5% level, with the two- to ten-year curve spread likely to reach 50 basis points sometime next year, Di Galoma said.
The U.S. Treasury market lost 1.8% this month, cutting this year’s gain to just 0.3%, according to a Bloomberg index through Dec. 23. The complex was up about 4.6% this year through September 17, the day before the Fed. started its rate-cutting cycle by cutting its policy benchmark half a percentage point. Last year, government bonds rose 4.1%, after losses of 12.5% in 2022 and 2.3% in 2021.
Government bonds continued lower after good demand for a second round of coupon-bearing debt. The U.S. Treasury Department sold $70 billion of five-year bonds on Tuesday after Monday’s auction of two-year securities was based on solid demand. On Thursday, the Treasury Department will sell $44 billion in seven-year bonds.
The Securities Industry and Financial Markets Association is recommending an early closing of the cash bond market at 2 p.m. Tuesday in New York ahead of the Christmas holiday on Wednesday.
Swap traders are pricing in about 0.33 percentage points of Fed cuts in 2025, which is less than the two quarter-point cuts Fed officials indicated in their latest quarterly interest rate projections.
What keeps some investors wary of taking big bets is that even with Republicans controlling both the U.S. House and Senate, they have slim majorities in both, so it’s unclear how many of Trump’s plans will actually come to fruition .
“There are a lot of possible paths this could take next year in terms of what policies could be implemented and how they could impact the economy,” said Julian Potenza, portfolio manager at Fidelity Investments, which manages $15 trillion in assets. “There is a lot of uncertainty, a kind of uncertainty upon uncertainty. Taking that into account, we are not currently taking large active bets against the benchmark. Our duration and curve positions are therefore reasonably close to home.”
–With assistance from Edward Bolingbroke.
(This updates rates and adds auction results.)
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