The 10-year Treasury yield reached a fresh 14-month high on Monday. Investors are anticipating crucial upcoming inflation reports. The yield was last seen at 4.77%, the highest level since November 1, 2023.
Global bond yields are on the rise. Traders predict a slower pace of interest rate cuts this year. This expectation is driven by signs of economic strength and uncertainty under President-elect Donald Trump’s policies.
The U.S. Federal Reserve is expected to act cautiously in response to these economic indicators. Data released last Friday showed strong job growth in December. Nonfarm payrolls grew by 256,000, up from 212,000 in November.
This figure was above forecasted numbers, indicating stronger-than-expected economic activity. Attention now turns to the upcoming inflation data. The producer price index report is expected on Tuesday.
The consumer price index is due out on Wednesday. These reports are critical as they will provide further insights into price pressures within the economy. Mark Zandi, chief economist at Moody’s Analytics, commented on the bond market’s reaction.
“The bond market is sending a message that investors are worried about the economic policies dead ahead,” he said. The rate for a 10-year U.S. bond has drifted upward significantly since Trump’s election victory on November 5. It has risen from around 4.29% to 4.76%.
The 20-year bond yield has increased from 4.57% to 5.03%. The 30-year bond has gone from 4.45% to 4.95%. These rates have steadily increased despite the Federal Reserve cutting rates three times since September.
Shorter-term debt rates have remained stable. Douglas Holtz-Eakin, president of the American Action Forum, noted the rise could mean two things. It could indicate investors think interest rates will be higher in general, regardless of short-term Fed actions.
Or at least some investors are worried about the U.S.’ ability to pay its debts. “Regardless of which you believe, it is bad news,” Holtz-Eakin wrote.
Treasury yields surge on inflation data
“The recent move in long rates is a warning to the incoming Trump Administration.”
The bond market’s reaction is reminiscent of the early 1990s. At that time, the incoming Clinton administration faced sharp internal divisions over economic policy. Deficit hawks won out, and Clinton passed a budget package in 1993 that helped the government eventually see a surplus.
James Carville, Clinton’s campaign guru, famously remarked on the power Wall Street exerted over policymaking. “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market.
You can intimidate everybody,” he said. Another reason for bond market nervousness is the looming debt limit deadline. Congress will need to raise or suspend the country’s debt limit this year to avoid defaulting on U.S. debt.
Treasury Secretary Janet Yellen said accounting gimmicks to stay beneath the current limit may only last until mid- to late-January. If Republicans delay legislation to preserve temporary 2017 tax cuts, it could coincide with the debt ceiling debate. This would raise the political stakes for debt-wary lawmakers.
The House GOP is mulling a $1.5 trillion debt limit boost paired with $2.5 trillion in 10-year spending cuts. However, the Congressional Budget Office projects the debt will be $3.2 trillion higher by September 30, 2026. A hike twice as large as the GOP plan may be needed to prevent default.
To avoid another debt limit fight through the November 2026 elections, a $4 trillion hike – the biggest ever – might be required. House Speaker Mike Johnson has tried to ease fears, saying Republicans would pass a debt limit hike as part of a larger tax cut bill. But it’s been almost 20 years since Republicans passed a debt limit bill by themselves.
Since then, Democrats have either passed it or helped Republicans do so. Rep. Tom Cole, who chairs the House spending committee, thinks the GOP can pass a debt limit hike if other measures are included to win over hesitant members.
“We’re not going to lose the full faith and credit of the United States in a Trump administration,” he said. Zandi noted the fiscal picture is much worse now than in the 1990s when “bond market vigilantes” influenced Clinton’s policies. U.S. debt compared to the size of the economy was less than 50% then.
“Now it’s 100% and headed north very quickly. And of course, if there are tax cuts, it will go north even more quickly,” he said. “So I think the bond market is beginning to have a lot of agita about that.”
