Investors are starting to pay closer attention to the months-long selloff in longer-dated Treasury bonds and its implications for the stock market’s performance and the health of the domestic economy heading into the first half of the year.
But the near-term moves might more sharply reflect concern about President-elect Donald Trump’s policy ambitions, which include significant tax cuts, tariffs on imported goods, and wholesale immigration changes. These are paradoxically seen as driving U.S. stocks higher.
The bond market’s sensitivity to Trump’s arrival in the White House next week was on full display earlier this week when longer-dated Treasury yields powered higher.
That market move followed an hour-long news conference at which Trump declined to rule out military action to take Panama and Greenland. He also alluded to “economic force” to compel Canada to give up its sovereignty and join the U.S. and using tariffs to pay for the as-yet-unfunded tax cuts promised during his campaign.
President-elect Donald Trump’s campaign vows on tax cuts, tariffs and immigration are roiling the bond market.
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The moves accelerated in early Wednesday trading as well after CNN reported that Trump was planning to use the International Economic Emergency Powers Act to justify tariffs on a range of goods from rivals worldwide.
He also declared that inflation is “raging” and that interest rates are “far too high” in what is likely to be the first of a series of mixed messages he will send to Federal Reserve Chairman Jerome Powell over the final 16 months of his term.
Wider fiscal deficits and higher bond yields
Alongside some labor-market data that suggest a resilient job market heading into the new year, as well as a stronger-than-expected reading from the Atlanta Fed’s GDPNow forecasting tool, Treasury yields tested the highest levels since late April and could be set for further increases in coming weeks.
“We think these moves largely reflect concerns about fiscal deficits and future U.S. Treasury issuance, as a result of initiatives put forth by the incoming administration,” said David Rogal, lead portfolio manager of BlackRock Total Return Fund.
“So, while a significant amount of risk is already priced, this trend can continue depending on how policy evolves,” he added.
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Benchmark 10-year-note yields traded as high as 4.735%, the highest since late April and a level that pegged the difference between 2-year notes at around 43 basis points, or 0.43 percentage points.
The so-called term premium — the extra yield that investors demand to hold longer-dated bonds — was pegged at around 50 basis points by the New York Fed, the highest since 2014.
“Inflation is a concern even before we account for fiscal easing or tariffs,” Bank of America strategists wrote Wednesday. “These policy changes would pose upside risks to the Fed’s core [personal consumption expenditure] projection, which sees the central bank’s preferred gauge easing only to 2.8% by the end of the year.” The Fed’s inflation target is 2%.
Traders pare bets on Fed interest-rate cuts
Traders are already paring bets regarding Federal Reserve interest-rate cuts. They are now seeing just two reductions in the first half, down from the four that were priced in prior to the November election.
But investors might also soon trim their growth and corporate forecasts if the rise in yields takes benchmark 10-year notes to the 5% threshold.
“A higher term premium, reflecting concern about U.S. debt, could reduce Congress’s willingness to pass more spending than the expected extension of the 2017 Tax Cuts and Jobs Act,” said Lauren Goodwin, economist and chief market strategist at New York Life Investments.
She argues that even with 10-year yields having moved into the “danger zone” for market outcomes, equity-market leadership hasn’t turned defensive. But she adds that “uncertainty around tariffs” is a key factor that can’t be handicapped.
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The Treasury’s benchmark 30-year bond is also on the move, with yields rising to just short of the 5% threshold, the highest levels since November 2023.
A solid auction of $22 billion in new bonds on Wednesday soothed some of the selloff concern, with foreign buyers attracted to the high yields and to the debt’s ranking in the global fixed-income ecosystem, compared with benchmarks in Japan, Europe and the U.K.
Longer-dated yields hinder the broader economy
And while the short-dated bond yields have become largely anchored to Federal Reserve rate forecasts, and their moves less significant for the banking and financial sector, longer-dated bond yields are hitting the broader economy.
The Mortgage Bankers’ Association said Wednesday that interest rates on 30-year fixed mortgages rose to 6.99% last week, the highest since July, “putting a damper on purchase activity.”
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“Purchase applications declined for both conventional and government loans and dropped to the slowest weekly pace since February 2024,” said the MBA’s deputy chief economist, Joel Kan.
Stocks are taking the hit
Stocks are also stressed, with the S&P 500 breaching key technical levels to the downside during 2025’s first few trading days. Amid some of the heaviest daily volumes since 2021, they’ve held onto a slim 0.25% gain for the month following Wednesday’s close.
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“There are also some meaningful uncertainties about what Trump 2.0 will bring, but mostly it’s about the clear intention to employ tariffs, which may be the right long-term strategy but could be disruptive in the short term, particularly on inflation statistics,” said Louis Navellier of Navellier Calculated Investing.
“The cure for the uncertainty will be earnings, which truly kicks off a week from today with JP Morgan (JPM) and the following Monday with the inauguration of Trump when we will hear what his administration’s near-term plans are,” he added. “Volatility may continue until then.”
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