At the beginning of the new year, bond traders have lowered their expectations for US Treasuries due to the resilience of the USA economy and the continued threat posed by the tax cuts and tariffs policies of the elected President Trump.

Strong economic data, the significant victory of Trump's Republican Party, and cautious remarks from Federal Reserve officials have led to a downturn in the US Treasury market, with investors readjusting their expectations for the Federal Reserve. The USA government will issue a new $119 billion in bonds this week, causing unease in the market.

On Monday, the USA will issue $58 billion in three-year Treasury bonds, and on Tuesday and Wednesday, it will auction 10-year and 30-year Treasury bonds respectively, as former President Carter will hold a state funeral on Thursday, moving the bond auction date forward by one day.

This adjustment has impacted longer-term US Treasuries the most, with the benchmark 10-year US Treasury yield rising to over 4.6%, about a percentage point higher than the level when the Federal Reserve first began to ease MMF policy in September.

The volatility of the two-year US Treasury is relatively mild, reflecting a shift by investors towards bonds that are more influenced by the Federal Reserve's policy rates.

Priya Misra, a portfolio manager at JPMorgan Asset Management, stated, "People are very concerned about inflation (tariffs, fiscal stimulus, immigration), and they remain optimistic about growth (fiscal stimulus, deregulation), which explains the changes in interest rates over the past few months."

The bearish outlook for the bond market signals a shift from early 2024, when many on Wall Street expected that once the Federal Reserve began to lower rates from their over twenty-year highs, the bond market would experience a strong year.

However, these expectations have proven premature, as investors are now reluctant to bet on a bond market rebound due to the ongoing growth of the economy. Meanwhile, Trump's tax cuts and tariff plans may exacerbate inflationary pressures by increasing fiscal stimulus and raising import prices. The rising deficit could also lead to an increase in US Treasury supply.

Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, stated that Holding short-term US Bonds is not a bad idea at the moment. He said, “It's best to stay vigilant even before you see the pain in the economy, even if US Bond yields have risen significantly.”

Currently, Futures traders expect that the Federal Reserve may maintain interest rates until June, and that it might only lower its benchmark rate by 50 basis points throughout 2025.

Institutions pointed out that if Trump delivers on what he outlined in his Social Media posts, it will trigger a sell-off of US Bonds; however, any spike in yields may be limited to within 30 basis points, keeping yields below 5%.

On Friday, the USA Department of Labor will release the latest non-farm payroll report, which is expected to show an increase of 160,000 jobs in December, slightly down from an increase of 227,000 jobs the previous month. Given the significant rise in US Bond yields, JPMorgan's Misra stated that an unexpected slowdown in job growth could lead to a rebound in US Bond prices.

She said, “Weak data will prompt a re-evaluation of the likelihood of a Federal Reserve rate cut in March.”

Editor/ping