(Bloomberg) -- The yield on 30-year US Treasuries climbed to the highest in more than a year in a session that gave investors a taste of how President-elect Donald Trump may roil financial markets in the coming months.
The rate on the long bond climbed as much as 5 basis points on Monday to about 4.86%, the highest since November 2023. It was propelled in part by supply pressure, as demand was soft for the first of three Treasury auctions this week and as a slew of high-grade corporate bond offerings competed for investor cash.
Traders were bracing for auctions of 10- and 30-year Treasuries on Tuesday and Wednesday — each a day earlier than normal due to Thursday's state funeral for former President Jimmy Carter. Yields reached daily highs during the US morning after Trump refuted a Washington Post report that a narrower tariff plan is under consideration. Concerns that trade protectionism will stoke inflation have weighed on bonds since Trump was elected in November.
"You have a tremendous amount of debt hitting the marketplace," Gregory Peters, co-chief investment officer at PGIM Fixed Income, said on Bloomberg TV. "The supply just keeps coming and coming. You have that coupled with maybe inflation being a little more sticky or reversing moving higher, that puts more pressure on the bond markets."
The three-year note auction drew 4.332%, more than a basis point higher than its yield just before the auction, a sign that demand fell short of expectations.
Longer-maturity bonds have been hit hardest in recent weeks. The 10-year yield has risen by about 50 basis points since early December, reaching 4.64% on Monday, the highest since May. It's about 35 basis points higher than two-year rates, the largest premium since May 2022.
5% View
Jim Bianco, founder of Bianco Research, said the 10-year yield may rise toward 5%, a level it last reached in October 2023, which was the highest since 2007.
"We're in a secular rise in interest rates," Bianco said on Bloomberg Television. "It didn't end 15 months ago."
The dour outlook for Treasuries was echoed by 57% of the 553 respondents to the latest MLIV Pulse survey, who expect higher Treasury yields as the year begins. Those expectations come after the Federal Reserve's December meeting showed policymakers scaled back their outlook for interest-rate cuts to just two quarter-point moves this year.
Rather than changing Fed expectations, the majority of the recent rise in 10-year yields reflects the perceived risks of holding longer-dated bonds. A New York Fed model tracking the 10-year Treasury term premium — a gauge measuring the extra yield investors demand for holding longer-maturity bonds — climbed to a level last seen in 2015.
The impact of higher yields is spilling over to other asset classes too. Morgan Stanley strategists say rates are "the most important variable to watch" in early 2025 for stocks. In currency markets, higher rates have boosted the dollar, which just posted its strongest yearly advance in nearly a decade.
What Bloomberg strategists say...
"Bond investors may be facing a lose-lose dynamic coming out of Washington. A smooth passage of big spending plans would hurt, but so might political chaos that brings debt-ceiling angst back into play."
— MLIV strategist Garfield Reynolds. See the full note here.
Trump's incoming administration has made clear it will aim to deliver many of its key legislative policies as quickly as possible. House Speaker Mike Johnson said Sunday that an all-encompassing bill would be ready for Trump to sign "certainly by May" and perhaps the end of April.
Any resurgence of inflation would likely slow the pace of Fed rate cuts. Comments from Fed officials over the weekend, including San Francisco Fed President Mary Daly, reinforced that view, and futures traders anticipate that policymakers could hold rates steady until as late as June.
--With assistance from Carter Johnson, Kristine Aquino and Alice Gledhill.
(Adds bond term premium.)
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