(Dec 24): Traders continue to see a slower pace of interest rate reductions by the Federal Reserve (Fed) next year and the potential worsening of country’s fiscal backdrop under US President-elect Donald Trump’s administration.
The rise in longer-term Treasury yields outstripped that of shorter maturities, adding to the yield-curve steepening momentum of recent weeks. The gap between 10-year yields and those that mature in two years is hovering at about 25 basis points, up from nearly zero at the start of the month. Two-year yields were at one point 51 basis points above those of 10-year notes earlier this year in late June, in a so-called inverted yield curve pattern.
The moves on Monday built on a rise in yields last week following US central bank officials latest quarterly projections — dubbed the dot plot — in which they halved estimates for the total amount of rate reductions next year. The forecasts, according to the median level, also notched higher the outlook for the Fed’s long-run rate, taken in the market as a proxy for the central bank’s neutral policy level.
“The long-end has been kind of flexing its muscles, with investors lifting risk-premium they see in the debt,” said Andrew Brenner, the head of international fixed income at NatAlliance Securities. “The fiscal situation is one factor behind the rise in long-end risk premium as well as the outlook for more supply. Overall what we are seeing is a normalisation of the yield curve.”
Interest-rate swaps contracts show that traders are betting on less than the two-quarter point cuts officials signalled in their dot plot. Through the end of 2025, the contracts are pricing in just 0.33 percentage point of rate reductions. There are no Fed officials slated to speak this week.
Treasuries remained under selling pressure on Monday despite a weaker-than-expected report on US consumer confidence and solid demand at an auction of two-year notes. Confidence unexpectedly sank in December for the first time in three months on concerns over politics and the outlook for tariffs and economy.
Treasury securities received solid demand at a US$69 billion sale of two-year notes on Monday and ahead of the sale of US$70 billion in five-year notes on Tuesday and US$44 billion in seven-year notes on Thursday.
“Despite the suggestion from the dot plot that the Fed may decelerate the pace of easing over the course of 2025, the two-year versus 10-year yield curve did not re-flatten,” said Chris Ahrens, a strategist at Stifel Nicolaus & Co.
“This may be signalling that there is a transition occurring whereby fiscal concerns and general policy uncertainty will lead investors to demand a higher term premium on long-term Treasuries,” he said.
Uploaded by Siow Chen Ming