As a Holiday-shortened Week Begins, Treasury Yields Dip From 7-month Highs

U.S. bond yields edged lower early Monday after concerns about persistent inflation and the potential for President-elect Donald Trump’s policy agenda to reignite inflationary pressures had recently pushed benchmark yields to their highest levels since late May.

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Current Trends in Bond Yields

The yield on the 2-year Treasury declined by 2.2 basis points, settling at 4.312%. Similarly, the 10-year Treasury yield fell 3.3 basis points to 4.597%, while the yield on the 30-year Treasury decreased by 2.2 basis points, landing at 4.800%.

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These slight declines come after the 10-year Treasury yield recorded its most significant three-week rise since September 2022, surging over 46 basis points during that period.

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Factors Influencing the Market

Despite the Federal Reserve cutting interest rates three times since September, the benchmark 10-year yield has climbed nearly a full percentage point in the past three months. This sharp rise reflects investors’ belief that the U.S. economy’s resilience may keep inflation from declining significantly, reducing the likelihood of further monetary easing by the Fed.

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The start of the week is expected to see relatively subdued trading activity. Many market participants are extending their holiday breaks, and the bond market will close early at 2 p.m. Eastern on Tuesday before shutting down completely on Wednesday for New Year’s Day.

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Adding to the lull in activity is a lack of major economic data releases. The shortened holiday week has postponed the nonfarm payrolls report, typically released on the first Friday of the month, to January 10.

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However, a few key indicators are set for release on Monday. At 9:45 a.m. Eastern, the Chicago Business Barometer for December will be published, followed at 10:00 a.m. by the pending home sales report for November.

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Federal Reserve Outlook

Market expectations for further interest rate cuts by the Federal Reserve have diminished. According to the CME FedWatch Tool, there is now just an 11.2% probability that the Fed will reduce its benchmark rate by at least 25 basis points from the current range of 4.25% to 4.50% after its next meeting on January 29. This marks a decline from the 16.9% likelihood priced in a month ago.

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Broader Implications

The recent uptick in bond yields underscores a complex economic environment where robust economic performance is counterbalanced by lingering inflation concerns. While the Federal Reserve has eased rates to stimulate growth, higher yields suggest that investors remain cautious about the central bank's ability to curb inflation without undermining the broader economy.

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With trading volumes expected to remain light at the start of the week, significant market moves are unlikely until more comprehensive economic data is available. The release of reports like the Chicago Business Barometer and pending home sales may provide some insights into economic conditions, but the market’s focus will likely shift to the January 10 nonfarm payrolls report, which could offer a clearer picture of employment trends and economic momentum as 2025 begins.

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Conclusion

U.S. Treasury yields are experiencing modest declines after a period of substantial gains, reflecting a delicate balance between inflation concerns and the outlook for Federal Reserve policy. While the bond market may see limited activity in the coming days due to holiday schedules and a lack of significant economic data, the evolving narrative around inflation and economic resilience will remain critical for shaping market expectations as the new year unfolds.

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