After a prolonged two-month selloff, the US bond market is showing signs of stabilizing, with investors stepping in as yields approach new peaks.
The dramatic rise in 10-year Treasury yields since mid-September has been driven by a combination of elevated inflation, robust economic data, and the market’s reaction to Donald Trump’s presidential victory. While uncertainty about the direction of yields persists, recent trends suggest cautious optimism among market participants.
The 10-year Treasury yield surged to over 4.5% on November 15, reflecting investor concerns over inflation and economic strength. However, a wave of substantial purchases quickly pushed yields back down, closing at 4.4% this past Friday—3 basis points lower than the previous week. This movement has sparked interest among fund managers, who now see opportunities in Treasuries at these levels.
Erin Browne of Pacific Investment Management Co. (Pimco) highlighted the appeal of Treasuries as both a low-volatility asset and a hedge against potential stock market declines. “If the 10-year yield rose back to 5%, I’d be very interested in buying more aggressively,” Browne said during a Bloomberg Television interview.
The recent behavior of the bond market signals a return to its traditional role as a counterbalance to equity market volatility. Treasuries, now yielding above 4%, have become increasingly attractive, particularly as federal government debt begins to decouple from stock price movements.
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This shift comes despite earlier expectations that bonds would rally once the Federal Reserve began cutting interest rates. Instead, yields have climbed higher, driven by strong economic performance and market recalibration of potential monetary and fiscal policy impacts under Trump’s presidency.
Adding to the market dynamics, President Trump has nominated Scott Bessent, the head of macro hedge fund Key Square Group, as the next US Treasury Secretary. Known for his fiscally conservative stance, Bessent has been critical of the Biden administration’s management of federal debt and the Federal Reserve’s recent rate cuts. His appointment signals potential shifts in debt management and fiscal policy, with implications for the bond market.
Bessent’s fiscal approach is expected to influence the government’s hefty debt sales, raising questions about how his policies will impact yield movements and inflation expectations.
Market sentiment remains cautious, as investors weigh the implications of potential Trump administration tariffs and fiscal stimulus measures. Subadra Rajappa, head of US rates strategy at Société Générale, observed, “Investors are playing it safe, not taking any strong positions. It’s more about pausing and understanding the dynamics.”
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Meanwhile, Felipe Villarroel, a portfolio manager at TwentyFour Asset Management, considers the current 10-year yield range of 4.25% to 4.5% as fair value but warns of continued volatility. With inflation moderating but not fully resolved, uncertainty over Trump’s policies and their impact on price growth adds to the complexity.
The bond market is poised for further shifts as investors await clarity on the Federal Reserve’s next steps. While swaps traders currently assign less than a 50% chance of a rate cut at the Fed’s upcoming meeting, they anticipate approximately 66 basis points of reductions by the end of 2025.
In this evolving landscape, the US bond market remains a focal point for investors, offering both opportunities and challenges amid economic resilience and political change. For now, Treasuries continue to serve as a cornerstone of stability, balancing risk and reward in an uncertain environment.