European Bond Yield Surge Drives U.S. Treasury Yields Up 3.85%

U.S. Treasury yields experienced an upward trend on Monday, primarily driven by the significant rise in European government bond yields. The surge in European bond yields was attributed to escalating market concerns over the potential failure of the European Union and the U.S. to reach a timely agreement, which could result in a 30% tariff on most goods traded between the two regions. This uncertainty prompted investors to seek the relative safety of U.S. Treasuries, leading to higher prices and lower yields for U.S. government bonds.

The yield curve, which measures the difference between short-term and long-term Treasury yields, flattened as a result of these movements. This flattening indicates a growing pessimism among investors regarding the economic outlook, as they anticipate lower growth and inflation in the future. The 5s30s yield curve spread narrowed from its steepest closing level since 2021, approximately 104 basis points, to around 102 basis points. Similarly, the yield curves in the U.K. and the eurozone also exhibited a flattening trend.

Despite the absence of significant economic data releases from the U.S. on Monday, market expectations for the Federal Reserve's monetary policy remained largely unchanged. The market continues to anticipate approximately 45 basis points of rate cuts by the end of the year. Analysts from major financial institutions suggested building long positions in 5-year and 2-year U.S. Treasuries, predicting that the market will reflect more easing expectations over the next 18 months.

The 2-year U.S. Treasury yield stood at 3.8502%, the 5-year yield at 3.9061%, the 10-year yield at 4.3698%, and the 30-year yield at 4.9358%. The spread between the 2-year and 10-year yields was 51.746 basis points, while the spread between the 5-year and 30-year yields was 102.786 basis points. These movements underscore the market's cautious stance and the increasing demand for safe-haven assets amidst global economic uncertainties.