On January 9, according to Financial Associated Press (Editor: Xiaoxiang), at the beginning of the new year, one of the most notable market developments globally is undoubtedly the rush toward a 5% yield on U.S. long-term bonds.

As the prices of U.S. Treasury bonds continue to decline, various parties are clearly paying close attention to price movements in this sector. Especially on Wall Street, many Institutions have recently provided their interpretations of the trends and causes behind the price drop in U.S. Treasury bonds.

Notably, U.S. Treasury Secretary Yellen joined the discussion mentioned above on Wednesday. So, how does this experienced and well-informed former Federal Reserve Chair view the ongoing decline of U.S. Treasury bonds?

In response, Yellen stated in an interview on Wednesday that better-than-expected economic data has led to a repricing of interest rate expectations in the market, resulting in a sell-off of U.S. Treasury securities.

When asked about the factors leading to the decline in U.S. Treasury bonds and the rise in yields in recent weeks, she responded, "When we see strong data—economic performance indicators exceeding expectations, it suggests that the future interest rate path will be slightly higher than people are predicting."

In fact, the drop in U.S. Treasury bonds on Tuesday largely aligns with Yellen's statements. The U.S. Non-Manufacturing PMI and labor market data released that day performed excellently, leading traders to no longer fully bet on the Federal Reserve lowering interest rates before the end of July.

$U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ During Wednesday's trading, it once reached around 4.73%, the highest level since April last year. However, it narrowed its gains by the end of the day, ultimately rising slightly by 0.8 basis points to report 4.696% for the whole day.

In addition, Yellen emphasized the term premium in her latest speech. Yellen noted that the so-called term premium has begun to normalize. Previously, the term premium had been at a very low level for some time, but now the economy has been performing well, driving the term premium to start rising.

The term premium refers to the extra return that investors require for purchasing long-term Bonds instead of simply rolling over short-term Bonds.

A message to the new government.

Although the USA has not made much progress in terms of fighting inflation in recent months, Yellen still expressed her belief that the rate of price increases is on a downward trajectory, and the labor market is not a source of pressure for rising prices.

Yellen also stated that she hopes the incoming Trump administration will take the issue of the USA's fiscal deficit seriously and hopes that the Bonds market will not be impacted by the phenomenon of 'Bond vigilantes' from decades ago - when due to concerns about the scale of public borrowing, investors demanded higher yields to be willing to buy government Bonds.

Yellen noted that she does not want to see the situation develop to the point where 'Bond vigilantes' emerge, as global investors expect the USA to responsibly manage its fiscal policy instead of relying on market reactions to reduce the deficit.

Trump and his Treasury Secretary nominee Scott Bessent are currently hoping to reduce the deficit through spending cuts, but Yellen doubts whether there is enough room for cuts outside of defense and welfare programs. 'It's hard to see how this plan would work,' Yellen said.

In fact, although Yellen did not overly criticize the Trump 2.0 administration's policy agenda in her latest speech, many industry insiders currently believe that the significant surge in U.S. Treasury Notes Yield in recent months is closely related to Trump's imminent accession to power and his series of policy proposals.

Nobel Prize-winning economist Paul Krugman wrote in an article titled "Is There a Crazy Premium on Interest Rates?" this week that the rise in long-term rates, such as the 10-Year Treasury Notes Yield, may reflect a terrifying, slowly spreading doubt that Trump might really believe in his crazy economic policy rhetoric and will act according to those beliefs.

Krugman doubts that the market is reacting to the president-elect's statements about tariffs. He cited the nearly unanimous view among economists that Trump's high tariffs, tax cuts, and massive deportation agenda will lead to severe inflation—although it "might not happen immediately."

"If Trump is to execute any substantive part of that agenda, the Federal Reserve will certainly have to pause any further rate cuts. In fact, it is highly likely that they will feel the need to raise rates again," Krugman wrote.

Editor/rice