(Bloomberg) — Treasury yields rose on Monday as traders continue to see a slower pace of interest rate reductions by the Federal Reserve next year and the potential worsening of country’s fiscal backdrop under President-elect Donald Trump’s administration.
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The rise in longer-term Treasury yields outstripped that of shorter maturities, adding to the yield-curve steepening momentum of recent weeks. The gap between 10-year yields and those that mature in two years is hovering at about 25 basis points, up from nearly zero at the start of the month. Two-year yields were at one point 51 basis points above those of 10-year notes earlier this year in late June, in a so-called inverted yield curve pattern.
The moves Monday built on a rise in yields last week following US central bank officials latest quarterly projections — dubbed the dot plot — in which they halved estimates for the total amount of rate reductions next year. The forecasts, according to the median level, also notched higher the outlook for the Fed’s long-run rate, taken in the market as a proxy for the central bank’s neutral policy level.
“The long-end has been kind of flexing its muscles, with investors lifting risk-premium they see in the debt,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. “The fiscal situation is one factor behind the rise in long-end risk premium as well as the outlook for more supply. Overall what we are seeing is a normalization of the yield curve.”
Interest-rate swaps contracts show that traders are betting on less than the two-quarter point cuts officials signaled in their dot plot. Through the end of 2025, the contracts are pricing in just 0.33 percentage points of rate reductions. There are no Fed officials slated to speak this week.
Treasuries remained under selling pressure Monday despite a weaker-than-expected report on US consumer confidence and solid demand at an auction of two-year notes. Confidence unexpectedly sank in December for the first time in three months on concerns over politics and the outlook for tariffs and economy.
What Bloomberg Strategists Say …
“In its latest dot plot, the Fed has implicitly outlined a real neutral policy rate of 100 basis points, a rate it has raised successively this year. While the real neutral rate may not be that high, Treasury 10-year yields need to reflect both the skepticism that the Fed policy is on auto pilot and that the real neutral rate may be more elevated than its dot plot estimate.”
