As Trump's presidential inauguration ceremony approaches, bond traders deeply entrenched in the sluggish U.S. Treasury market are preparing for more similar bad scenarios, with Options indicating$U.S. 10-Year Treasury Notes Yield (US10Y.BD)$that it could soar to 5%—a level not seen since October 2023.

Speculation that Trump's policies will stimulate the acceleration of the U.S. economy, while also accelerating inflation and increasing the deficit, has caused the yield on 10-year U.S. Treasuries to surge by about half a percentage point over the past month, approaching 4.7%. This week's wave of corporate bond issuances and the $119 billion U.S. Treasury auction have added upward pressure on U.S. Treasury yields, with more Treasury auctions expected in the coming weeks.

Gargi Chaudhuri, Chief Investment and Portfolio Strategist for the Americas at Blackrock, stated: "We need certainty in fiscal policy. As Trump’s inauguration takes place, we will hear more about fiscal policy. The unknown of more U.S. Treasuries entering the market will deter buyers."

Meanwhile, optimistic economic data such as job openings and services data released on Tuesday pushed expectations for further rate cuts by the Federal Reserve to the second half of this year.

Against this backdrop, investors are preparing for a significant rise in yields. Options from CME Group on Tuesday indicated that the new trading target for the 10-year U.S. Treasury yield is to rise to 5% by the end of February. This may just be the beginning, with Padhraic Garvey, Global Debt and Rates Strategist at ING Groep NV, estimating that the yield on 10-year U.S. Treasuries could reach about 5.5% by the end of 2025, while Arif Husain from T. Rowe Price stated that 6% is also within the possible range.

Recently, the surge in U.S. Treasury Bonds yields seems to be accompanied by an increase in short positions in the futures market. Over the past five trading days, the number of open contracts measuring market activity has increased in what are called the over-10-year bond contracts, which track the regular 10-year spot bonds.

In addition, over the past nine trading days, the number of open contracts for long bond contracts (comparable to 2040 spot bonds) has risen on eight trading days. The increase in open contracts during the sell-off roughly indicates that new Put bets have emerged.

It is certain that even as U.S. Treasury Bonds yields steadily rise, some investors see opportunities arising with the start of the new trading year. JPMorgan's latest client survey shows that long positions have increased to their highest level in over a year, although short positions have also risen over the past week.

The 10-year U.S. Treasury auction suffered a major failure.

After the latest economic data indicated a decreased likelihood of the Federal Reserve cutting interest rates again before mid-year, the U.S. government's monthly 10-year Treasury auction on Tuesday recorded the highest yield since 2007.

The scale of this 10-year U.S. Treasury auction was $39 billion, with a winning rate of 4.680%, marking the highest level since August 2007 and the first instance since October of last year to show a tail spread indicating weak demand. Tracy Chen, a portfolio manager at Brandywine Global Investment Management, stated that the data "reinforces the market's view of the strength of the U.S. economy and unconstrained interest rates."

As early as late September of last year, traders had fully anticipated that the Federal Reserve would cut rates again before March this year, but they abandoned bets on rate cuts in the first half of the year. Before the non-farm payroll data for December was released on Friday, a surprising increase in JOLTS job openings for November was reported on Tuesday, along with an unexpected rise in the ISM services index for December.

Michael Cloherty, head of U.S. interest rate strategy at UBS Securities, said, "People are still concerned about rising inflation risks, leading to more term premiums. There are also concerns about needing to finance budget deficits, and compared to last year, there has been a shift where people are more focused on a soft landing (or no landing) rather than a hard landing."

The current yield on the 10-Year Treasury Bonds is approaching 4.70%, the highest level since May, while$U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$it has exceeded 4.92% for the first time in more than a year.$U.S. 2-Year Treasury Notes Yield (US2Y.BD)$ On Tuesday, it rose by about 2 basis points to 4.29%.

Although the yield on 10-Year Treasury Bonds may reach 5% by the end of 2023, the result of this auction represents the highest yield for newly issued bonds since August 2007. During the post-pandemic period, the yield on 10-Year Treasury Bond auctions has frequently been below 1%. The auction for the 30-Year Treasury Bonds on Wednesday will also set a record high yield since 2007.

The results of this auction are noteworthy, as they indicate that the fixed rate for the next issuance of new 10-Year Bonds, set to go public in February, could reach its highest level in nearly twenty years.

Editor/Rocky