10-Year Treasury Yield Logs Sharpest Drop in a Month, Kicking Off Holiday-Shortened Week
Wednesday, Jan 1, 2025 3:33 am ET
The 10-year Treasury yield logged its sharpest drop in a month on Monday, December 30, 2024, as investors sought safe-haven assets amid geopolitical uncertainty and concerns about President-elect Donald Trump's policy agenda rekindling inflation. The yield on the 10-year Treasury BX:TMUBMUSD10Y fell 7.4 basis points to 4.546%, marking the biggest one-day decline since November 29, 2024.

The retreat in Treasury yields was the biggest one-day decline for 2-year and 10-year yields since November 25, and the largest for the 30-year yield since November 29, according to Dow Jones Market Data. The yield on the 2-year Treasury BX:TMUBMUSD02Y fell 7.2 basis points to 4.253%, while the yield on the 30-year Treasury BX:TMUBMUSD30Y retreated by 4.6 basis points to 4.764%.
The decline in Treasury yields can be attributed to several factors, including geopolitical uncertainty, risk aversion, and increased demand for safe-haven assets. Passing an infrastructure package became more difficult every day, making a multitrillion-dollar package less likely. This political uncertainty, along with the prospect of President-elect Donald Trump's policy agenda rekindling inflation, contributed to investors' risk aversion and drove demand for safe-haven assets like Treasury bonds.
Additionally, the recognition that Treasury bonds provide a safe return in an increasingly risky economic and national security environment also contributed to the increased demand for bonds. This increased demand, coupled with the factors mentioned above, led to the sharp drop in the 10-year Treasury yield.
The decline in Treasury yields has significant implications for the yield curve and economic growth. The yield curve is a graph that plots the yields (interest rates) of bonds with different maturities. A normal yield curve is upward-sloping, meaning that longer-term bonds have higher yields than shorter-term bonds. However, when the yield curve inverts, it signals that investors expect longer-term interest rates to decline, which can indicate a potential recession.
In this case, the drop in the 10-year Treasury yield has caused the yield curve to flatten, as shorter-term yields have not declined as much as longer-term yields. This flattening of the yield curve can be seen as a resetting of concerns about higher growth and inflation, as investors appear to be backing away from the inflation trade and the possibility of a return to 1970s-style inflation.
The factors contributing to this down cycle in Treasury yields include politics, inflation expectations, increased demand for bonds, and productivity improvements. Passing an infrastructure package becomes more difficult every day, making a multitrillion-dollar package less likely. Inflation is a feature of the initial post-pandemic recovery but not a significant risk, as professional investors appear to be backing away from the inflation trade. There is a recognition that Treasury bonds provide a safe return in an increasingly risky economic and national security environment. Improvement in some of the sectors hit hardest by the pandemic, along with working from home, will most likely result in re-optimized working arrangements and a strong medium-term increase in productivity, lifting wages and living standards.
Sub-2% interest rates are not what a healthy economy would support, and they suggest the need for sustained support from the fiscal and monetary authorities. An infrastructure package that increases the productivity and competitiveness of the U.S. economy will pay for itself when interest rates are this low.
In conclusion, the sharp drop in the 10-year Treasury yield is driven by geopolitical uncertainty, risk aversion, and increased demand for safe-haven assets. This decline has significant implications for the yield curve and economic growth, as it contributes to the flattening of the yield curve and signals a resetting of concerns about higher growth and inflation. The factors contributing to this down cycle in Treasury yields include politics, inflation expectations, increased demand for bonds, and productivity improvements. As yields continue to decline, investors should consider the potential impacts on future market trends, particularly in the bond and equity markets, as well as inflation expectations and monetary policy.