Bond Market Summary: Rates Rip on Renewed Inflation Concerns

The Treasury market faced downward pressure on Tuesday as longer-dated yields rose sharply, driven by stronger-than-expected economic data and growing concerns over persistent inflation. The 30-year yield climbed to its highest level since November 2023, while the 10-year yield reached levels not seen since April. These moves reflected market sentiment in response to robust economic indicators and geopolitical tensions.

Market Reaction to Data and Geopolitics

Treasury trading opened with a bearish tone, fueled by news of rising grocery inflation in the United Kingdom and escalating tensions with China. The United States added companies like Tencent and CATL to a list of entities linked to China's military cooperation, amplifying concerns over geopolitical stability.

The selloff in Treasuries intensified following the release of economic data, including the ISM Services PMI for December, which climbed to 54.1 percent from November's 52.1 percent, exceeding expectations.

The accompanying Prices Index surged to 64.4 percent, marking its highest reading since January 2024. Meanwhile, the JOLTS report showed job openings increasing to 8.098 million in November from October’s revised figure of 7.839 million. These indicators underscored ongoing strength in the U.S. economy, dampening hopes for near-term rate cuts.

Shift in Rate Expectations

The strong data reshaped market expectations for Federal Reserve policy. The implied probability of a March rate cut fell to 39.1 percent from 46.7 percent, while expectations for a May cut dropped to 48.6 percent from 54.5 percent. This recalibration contributed to a steepening yield curve, with the 10-year and 30-year yields both rising by seven basis points to 4.68 percent and 4.91 percent, respectively.

Mixed Demand at Treasury Auction

The $39 billion reopening of 10-year Treasury notes met with lukewarm demand. The auction yielded a high rate of 4.68 percent, slightly above market expectations, and saw a bid-to-cover ratio of 2.53, roughly in line with recent averages. Indirect bidders, typically foreign buyers, accounted for 61.4 percent of accepted bids, lower than the 67.4 percent average, while direct bidders increased their share to 23.0 percent.

Sector Implications and Broader Market Trends

The inflationary signals weighed heavily on equities, with the S&P 500 declining 1.11 percent to 5,909 and the Nasdaq falling 1.89 percent to 19,490. Energy was a rare bright spot, bolstered by a one percent gain in crude oil prices. Commodities like gold and copper also posted gains, benefiting from inflation concerns and safe-haven demand.

On the geopolitical front, President-elect Trump's pledge to reverse offshore drilling bans and China's anticipated consumer goods trade-in program injected additional complexity into market dynamics. Meanwhile, the Atlanta Fed’s upward revision of its Q4 GDPNow forecast to 2.7 percent added to the perception of economic resilience.

Looking Ahead

Investors are bracing for a packed economic calendar on Wednesday, featuring key reports such as the ADP Employment Change, Weekly Jobless Claims, and the December FOMC Minutes. These releases will provide further insight into labor market trends and the Federal Reserve’s policy outlook. Additionally, a $22 billion reopening of 30-year Treasury bonds will test demand for long-dated securities.

Conclusion

Tuesday's Treasury market activity highlights the persistent tension between economic strength and inflationary pressures. The sharp rise in yields underscores investors' reassessment of monetary policy expectations, while the geopolitical backdrop adds uncertainty. As markets digest these developments, attention will turn to upcoming data releases and their implications for growth, inflation, and Federal Reserve policy.