New Signal? 10-Year Treasury Yield Climbs For Nine Straight Days Amid Powell's Hawkish Attitude

After the Federal Reserve's hawkish statement and the expectation to slow down the pace of easing next year, some records in the U.S. bond market have been further broken: the benchmark 10-year U.S. Treasury yield has welcomed a nine-day rise, and the yield curve has reached its steepest level in about 30 months.

The differentiation of yields across various maturities of U.S. Treasuries on Thursday was quite evident: short-term bond yields fell, while long-term yields soared. By the end of the New York trading session, the 2-year U.S. Treasury yield fell 4 basis points to 4.329%, the 5-year U.S. Treasury yield rose 1.6 basis points to 4.431%, the 10-year U.S. Treasury yield rose 4.6 basis points to 4.569%, and the 30-year U.S. Treasury yield rose 6.2 basis points to 4.74%.

The divergence in yields led to the 2-year U.S. Treasury yield being nearly 27 basis points lower than the 10-year U.S. Treasury yield, which is the steepest level of this most commonly mentioned U.S. Treasury yield curve since 2022.

After the Federal Reserve lowered the policy rate by a full 100 basis points in recent months, given the rebound in inflation and the potential for economic recovery to hinder the Fed's rate-cutting process next year, investors are unwilling to hold longer-term Treasuries, leading to the so-called steepening of the curve.

The Federal Reserve lowered the federal funds rate target range by another 25 basis points this week, to 4.25%-4.50%. However, Chairman Powell stated that further reductions in borrowing costs depend on future progress in fighting inflation. The Fed also released its latest interest rate dot plot on Wednesday, showing policymakers expect only two 25-basis-point rate cuts by the end of 2025. This is half the amount they expected for next year's rate cuts in September.

It is worth mentioning that after this week's Fed decision, some options traders have even turned their attention to the possibility of the Fed starting a rate-hiking cycle sometime next year.

The market trend related to the Secured Overnight Financing Rate (SOFR) options reflects the market's expectation that monetary policy will turn hawkish dramatically by the end of 2025, despite Fed Chairman Powell stating at this week's press conference that a rate hike next year is a highly unlikely outcome.

BMO Capital Markets' U.S. interest rate strategist Ian Lyngen said that the weakness in longer-term Treasuries is due to the Fed's hawkish stance, as well as pressure from the expansion of Treasury issuance, and the trend towards a steeper curve still has a long way to go before the end of 2024.

Many bond investors are currently focusing on whether President-elect Trump's tax reform policies can boost the economy and push up inflation, with the budget deficit potentially worsening further.

Considering the future deficit prospects, the thwarted outlook for Fed rate cuts, and the uncertainty of the Trump administration's policies, asset management companies prefer to hold short-term U.S. Treasuries, which provides support for the steepening yield curve. Many analysts point out that the steepening yield curve reflects pessimism in the long-term bond market, with expectations that inflation will rise again next year, including the increasing U.S. fiscal deficit, which will have to be filled by issuing more public debt.

Overall, the 10-year U.S. Treasury yield, known as the global asset pricing anchor, has steadily increased from a low of 3.60% in mid-September. Especially since the beginning of last week, the 10-year U.S. Treasury yield has risen for nine consecutive trading days, and the last time the yield of this term rose for ten consecutive days was back in 1978.

Creative Planning's Chief Market Strategist Charlie Bilello pointed out that three months after the Fed's first rate cut, the 10-year Treasury yield has soared by about 86 basis points. This is very different from the performance at the beginning of previous rate-cutting cycles when the 10-year U.S. Treasury yield either fell or remained essentially unchanged.