A New Trading Year Begins With 10-year Treasury Yields Near 7-month Highs

U.S. Treasury yields eased slightly on Thursday morning, with the benchmark 10-year yield hovering near its highest levels since late May. Analysts remained focused on the implications of a widening budget deficit and the recent uptick in the term premium, which reflects the extra compensation investors demand for holding longer-term government bonds.

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The 2-year Treasury yield slipped by 1.8 basis points to 4.231%, down from 4.249% on Tuesday. Meanwhile, the 10-year Treasury yield fell by 2.4 basis points to 4.553%, a decline from Tuesday’s 4.577%. Last week, the 10-year yield reached 4.619%, marking its highest closing level since May 29. Similarly, the 30-year Treasury yield declined by 1 basis point to 4.776%, compared to 4.786% on Tuesday, after reaching a peak of 4.810% last Friday—the highest level since April 25.

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U.S. financial markets were closed on Wednesday in observance of New Year’s Day, leaving Thursday’s session as the first trading day of 2025.

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The dip in yields comes amid ongoing concerns about the outlook for inflation and the U.S. budget deficit. The 10-year Treasury yield, while slightly off its recent highs, remains just 7 basis points below its seven-month peak, reflecting persistent investor caution. Last week’s selloff in long-term government bonds was fueled by apprehensions about inflationary pressures stemming from President-elect Donald Trump’s proposed policies, which include import tariffs and deportation of undocumented immigrants.

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Additionally, analysts pointed to concerns over the U.S. government’s ability to absorb the increased debt issuance needed to finance an expanding budget deficit. This has contributed to a rise in the term premium, indicating greater perceived risks associated with holding long-term Treasury bonds.

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“Rising term premia over the last three weeks helped push yields at the long end of the Treasury curve close to their 2024 highs,” said Will Compernolle, a strategist at FHN Financial. Although yields have dipped slightly from last week’s peaks, ongoing worries about increasing Treasury issuance and the possibility that the Federal Reserve may soon halt its current easing cycle are dominating sentiment as the new year begins.

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Market expectations for Federal Reserve rate cuts have been scaled back in recent months. According to the CME FedWatch Tool, there is only an 11.2% probability that the Fed will lower its benchmark interest rate by 25 basis points at its upcoming meeting on January 29. However, traders assign a greater than 50% chance of at least one 25-basis-point cut by the Fed’s subsequent meeting in March.

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The Fed’s benchmark interest rate currently stands at a range of 4.25% to 4.5%. Speculation about potential rate cuts has moderated as investors weigh the strength of the economy against the Fed’s desire to manage inflation and maintain financial stability.

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Fresh economic data released Thursday provided additional insight into the state of the U.S. economy. Initial jobless claims dropped to 211,000 in the final week of 2024, the lowest level in eight months. This figure underscores the continued resilience of the labor market, which has seen remarkably low levels of layoffs despite broader economic uncertainties.

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While Treasury yields have eased slightly, they remain elevated, reflecting persistent concerns over inflation, the federal budget deficit, and the potential end of the Federal Reserve’s current easing cycle. Investors are closely monitoring economic indicators and policy developments as they navigate an environment shaped by high term premiums and shifting monetary expectations. With the labor market showing signs of strength and market participants tempering their expectations for rate cuts, 2025 is shaping up to be a year marked by cautious optimism and heightened vigilance.

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