The Yield on Treasury Bonds Rises Following the Holiday Break as Trump Trade Revives

U.S. government bond yields rose Tuesday morning as trading resumed following the Veterans Day holiday. Investors returned with expectations that policies under President-elect Donald Trump could spur economic growth and increase inflationary pressures.

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Yield Movements

Yields on short, medium, and long-term U.S. Treasuries experienced gains on Tuesday. The 2-year Treasury yield rose 7.5 basis points, moving from Friday’s 4.253% to 4.328%. Meanwhile, the 10-year Treasury yield increased by 8 basis points, reaching 4.387% from 4.307% on Friday.

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Long-term bonds also saw gains, with the 30-year Treasury yield climbing by 5.5 basis points to 4.533%, up from 4.478%. Since yields move inversely to bond prices, this increase reflects a sell-off in Treasury bonds.

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Market Drivers

With the Veterans Day holiday over, market participants turned their attention to the impact of Trump’s anticipated economic policies. His proposals to curb immigration and impose tariffs on imports have fueled expectations that inflation may rise as a result of potential supply constraints and increased production costs. This heightened inflationary outlook has put pressure on bond yields, with investors reassessing their strategies.

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A key indicator of inflationary pressures will be the October U.S. consumer price index (CPI) report, set for release on Wednesday. This data will help clarify whether inflation is indeed accelerating. Jim Reid, a strategist at Deutsche Bank, pointed out that inflation expectations have already risen in recent months.

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As an example, the 2-year inflation swap rate has increased from 1.99% on Sept. 10 to 2.62% as of Monday. Reid noted that another upside surprise in inflation data would likely reinforce this trend, though he also mentioned that Deutsche Bank economists expect the core CPI to show a slight decline to a monthly rate of +0.26% in October.

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Interest Rate Outlook

Despite recent inflation concerns, the outlook for Federal Reserve policy remains uncertain. According to the CME FedWatch Tool, traders currently assign a 65.3% probability that the Federal Reserve will lower interest rates by 25 basis points at its December 18 meeting, targeting a new range of 4.5% to 4.75%.

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This probability has decreased from 84.4% a month ago, suggesting that some market participants are less convinced of a rate cut given recent economic data and inflationary concerns.

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In other economic data, the National Federation of Independent Business (NFIB) released its small-business optimism index for October, which rose by 2.2 points to 93.7. Although this marks an improvement, the index remains below its 50-year average of 98, making it the 34th consecutive month it has fallen short of this historical average.

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