Capers in the Bond Market: US Yields Reach New Heights

U.S. Treasury bonds are experiencing turbulent days: A surprisingly robust employment report fuels investors' expectations regarding the Federal Reserve's interest rate decisions. In view of the current data situation, they see a possible rate cut only in the second half of the year. The latest report shows that U.S. employment grew in December at the strongest rate in nine months. This triggered a sell-off in bonds and pushed the yields on 30-year U.S. bonds above the 5% mark for the first time in more than a year. The yields on 10-year bonds also rose to a new high since 2023, while the yields on two- to seven-year bonds also increased significantly. Zachary Griffiths of CreditSights notes that the report leads to a reassessment of short-term Fed expectations and a flattening of the yield curve. Swap traders have now slightly reduced the probability of Fed rate cuts for the year despite the strong jobs report. Friday's employment report confirms that the strength of the U.S. labor market remains robust even under high borrowing costs and political uncertainty. This fuels concerns about ongoing inflation trends. Inflation expectations, fueled by the planned economic policies of future President Donald Trump, are rising. The yields on inflation-protected bonds also show minor losses, indicating increased inflation rate expectations in the coming years. The increase in the 30-year bond yield above 5% is an important signal for markets, which are already under pressure from global inflation trends and rising debt levels. The focus is also on the yields of 10-year bonds, as market participants such as Amundi, T. Rowe Price, and ING predict that they could soon also reach the 5% mark. According to Michael Collins of PGIM Fixed Income, the markets are currently in an attractive buying zone as the long-term values in the government bond segment are to be found. This is reflected in a declining trend in 10-year bond yields since their 5% high in October 2023. A relaxation in Treasury auction activity and the end of a rigorous Fed rate hike cycle contributed to this. The pleasing recovery led to a 4% increase in the Treasury market in 2023, after a record loss was recorded the previous year. Currently, however, the market continues to face slight losses.