10-year Treasury Yield is Near 7 Month High to Kick Off the Holiday Shortened Week

Treasury yields edged higher on Monday, with the 10-year rate surpassing 4.5%. This follows last week's climb to its highest level since late May, as the Federal Reserve dampened expectations for significant rate cuts in 2025.

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The trading week is shortened due to the holidays, with the U.S. bond market scheduled for an early close on Tuesday and a full closure on Wednesday for Christmas.

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On Monday, the yield on the 2-year Treasury note rose by 0.8 basis points to reach 4.321%. It's important to note that yields and bond prices move in opposite directions. The 10-year Treasury yield increased by 0.6 basis points to settle at 4.534%, while the 30-year Treasury bond saw its yield rise by 1 basis point to 4.731%.

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Friday's pullback in yields followed the release of the personal-consumption-expenditures (PCE) index, a key inflation gauge closely monitored by the Federal Reserve. The data revealed that core prices, excluding food and energy, rose by 2.8% year-over-year in November. This figure matched October’s rate and was slightly below the 2.9% analysts had forecast. Despite this slight retreat, Treasury yields rose for the week overall.

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The Fed’s policy decisions last Wednesday played a pivotal role in shaping market sentiment. While the central bank delivered an expected quarter-point rate cut, it also adjusted its outlook for 2025, projecting only two rate cuts instead of the four previously anticipated.

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“The Treasury market is holding on to the recent price action as the holiday-shortened week gets underway,” noted Ian Lyngen and Vail Hartman, rates strategists at BMO Capital Markets, in a commentary. They added that the combination of an early market close on Tuesday, a holiday break on Wednesday, and reduced staffing levels through year-end could either lead to subdued yield movements or trigger volatile price action due to limited market participation.

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The 10-year Treasury yield reached 4.59% last week after the Fed’s announcements, before easing to around 4.53% by Friday. This midweek spike coincided with a sharp downturn in equity markets, underscoring the influence of Treasury yields on broader financial conditions.

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Tom Essaye, founder of Sevens Report Research, highlighted the potential impact of rising 10-year yields on the stock market. “At these levels, the 10-year yield is now a mild headwind on stocks, and the higher the 10-year goes from here, the stronger the headwind,” he remarked in a note on Monday.

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With the year-end approaching, market activity is expected to remain subdued. Investors are likely to adopt a cautious stance, refraining from significant trading moves in light of reduced staffing and thinner liquidity during the holiday period. This environment could either result in a lack of direction for yields or heightened volatility if market participants react strongly to unexpected developments.

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The Federal Reserve’s recalibrated policy outlook has added a layer of complexity to the market landscape. By signaling fewer rate cuts in 2025 than previously anticipated, the Fed has reinforced the notion of a more gradual approach to monetary easing. This has implications not only for bond markets but also for equities, as higher yields could weigh on stock valuations.

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The movements in Treasury yields reflect a delicate balancing act between inflation trends, monetary policy adjustments, and investor sentiment. While the PCE index suggested some stability in inflation, the Fed’s cautious stance on rate cuts indicates a continued focus on maintaining economic stability.

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As the bond market navigates this transitional phase, the interplay between yields and other asset classes will remain a key focus for investors. The trajectory of the 10-year yield, in particular, could serve as a barometer for broader market conditions, influencing everything from borrowing costs to stock market dynamics.

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In summary, Treasury yields have risen modestly, with the 10-year rate staying above 4.5% as the market processes the Fed’s latest policy signals. With a holiday-shortened week and reduced market activity, the near-term outlook for yields remains uncertain, though the broader implications for stocks and other assets are becoming increasingly evident.

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