Mike Dolan's look at the day ahead in US and global markets
Dragging up government borrowing costs across the globe, the new year's big rise in long-term US Treasury yields is flashing red as a long-absent risk premium in debt markets rebounds alarmingly amid fears of fiscal policy and rates interest.
The New York Federal Reserve's estimate of the 10-year 'term premium' – seen as the compensation investors seek for holding long-term Treasuries to maturity instead of rolling over short-term debt holdings – topped 50 basis points for the week this for the first time. since 2014.
Partly reflecting uncertainty over long-term inflation expectations and debt supply and the incoming US administration's intent on tax cuts, immigration curbs and tariff hikes, Treasury yields hit a 30-year high since 2023 on Tuesday and 10 year yields have reached their highest in almost 9 months.
At nearly 64bps, the 2-to-30-year yield curve gap on Wednesday reached its widest since the Fed began raising interest rates in March 2022. With the latest heavy Treasury debt sales this week front-loaded due to holidays the market on Thursday and issued a high seasonal corporate bond. in the background, $22 billion of 30 year 'long bonds' going under the hammer later today.
The more immediate cause of the bond market's anxiety – which sent the stock markets zipping again on Tuesday – comes from the week's consistently 'hot' economic statements – adding concern about future Fed rate cuts as President-elect Donald Trump's economic policies are apportion.
The December ISM survey of US service sector businesses showed that activity accelerated in December, while a measure of prices paid for inputs rose to a near two-year high.
And in a big week for US labor market updates, data showed that job openings in November grew to 8.098 million, beating forecasts for an increase of 7.7 million, and higher than October's numbers of 7.839 million.
The ADP private sector job reading for last month and the latest weekly jobless claims numbers are due later Wednesday ahead of Friday's national employment report. Markets and government offices are closed Thursday for the funeral of former President Jimmy Carter.
'VERY UNUSUAL'
The rapid growth and inflation readings are pushing back expectations for Fed easing, with futures not seeing another quarter point cut until June and suspecting no more this year. Only 38bps of feed easing is now priced in for the whole of 2025.
Minutes from the Fed's latest policy meeting, where policymakers indicated just 50bps of additional rate cuts for this year, are due to be released later on Wednesday.
But even given that recalibration, the move in bond yields – where 10-year yields have risen 100bps since September as the Fed cut 100bps over the same period – is “highly unusual”, according to Chief Economist Apollo Torsten Slok.
“The market is telling us something, and it's very important for investors to have an opinion on why long rates go up when the Fed cuts,” Slok told clients, raising fiscal concerns, less demand for bonds from abroad or unwarranted Fed cuts. possible reasons.
Rising Treasury yields, meanwhile, have lifted the dollar anew and also boosted long-term borrowing costs in other G7 economies in the slipstream. Most notably on Tuesday, British 'gilt' yields hit a 30-year high since 1998.
Although the 10- and 30-year Treasury yields ticked back early Wednesday, they have retained most of the week's sharp gains.
Adding to bond market tension, oil prices rose again on Wednesday as supplies from Russia and OPEC members tightened while US crude stocks fell last week, market sources said, citing figures from the American Petroleum Institute.
At 5%, the year-over-year increase in US crude is the highest since July.
US stock futures recovered a fraction of Tuesday's tech-led heavy losses early today, although Japanese and Chinese stocks fell again alongside a 0.8% drop in emerging market indices.
Chinese stock losses were pared in late trading there as markets digested Beijing's latest measures to widen the scope of consumer exchanges. But leading the decline on the ground, shares of semiconductor companies fell 0.7% as the US Defense Department expanded the list of companies allegedly aiding Beijing's military.
Domestically, uncertainty about the Trump administration's policies had been heightened by the president-elect's refusal to rule out using military or economic action to pursue the acquisition of the Panama Canal and Greenland, part of a broader expansionist agenda he has championed. since winning an election.
Trump also criticized America's spending on Canadian goods and military support for Canada, saying the United States receives no benefits from doing so, and called the border between the two countries “an artificially drawn line.”
With a domestic political hiatus following Canadian Prime Minister Justin Trudeau's decision to step down as leader of the Liberal Party, the Canadian dollar remained calm.
In Europe, stocks appeared to buck wider global nerves and hit three-week highs. European shares advanced on Wednesday, led by heavyweight financial stocks and as defense companies got a boost after Trump called for higher spending by NATO allies.
Trump said he believes European NATO members should spend 5% of their GDP on alliance defense.
Key developments that should give US markets more direction later on Wednesday:
* December US ADP private sector wages, weekly jobless claims, November consumer credit
* The Federal Reserve's Federal Open Market Committee releases the minutes of the latest meeting
* Federal Reserve Board Governor Christopher Waller speaks
* The US Treasury sells $22 billion of 30-year bonds
(By Mike Dolan, editing by XXXX; mike.dolan@thomsonreuters.com)
