Bond yields on longer-term securities, including U.S. Treasuries, have been rising significantly, reflecting a global trend observed in countries such as Germany, the UK, Japan, Italy, and France. Investors are increasingly moving away from these longer-term bonds due to perceived low yields, leading to a notable shift towards higher yields. Gargi Pal Chaudhuri from BlackRock has pointed out this significant movement in the market [cf352aa9].
In the U.S., the 10-year Treasury yield rose sharply, reaching 4.665% on January 16, 2025, up 60 basis points since early December 2024. The 2-year yield also increased to 4.287% during this period. This rise has been attributed to stronger economic data and higher growth expectations following President Trump's re-election, prompting investors to reassess their outlook on interest rates and inflation [b5836cfb].
The recent consumer price index (CPI) report for December, which showed core-CPI at 3.2%, slightly below the forecast of 3.3%, initially caused a drop in yields. However, the overall sentiment has shifted, with expectations of long-term inflation projected between 2.5% and 2.75%, according to Gershon Distenfeld from AllianceBernstein. This has led to a consensus that the Federal Reserve may keep interest rates higher than previously anticipated, with the outlook shifting from four rate cuts in 2025 to possibly one or none [cf352aa9].
Concerns over future government spending and deficits are also influencing bond yields, alongside the Fed's reduced intervention in the bond market. The ongoing sanctions on Russian oil, affecting major companies and oil tankers, have added to inflationary pressures, which could further impact the bond market [7dcdf54b].
In Japan, yields on Japanese government bonds (JGB) fell on January 17, 2025, following a decline in U.S. Treasury yields. The two-year JGB yield decreased by 1 basis point to 0.68%, while the five-year yield dropped 0.5 basis points to 0.86%. Federal Reserve Governor Christopher Waller's comments about potential U.S. rate cuts have influenced market sentiment, while swap rates indicate a high probability of the Bank of Japan raising its policy rate at its upcoming meeting [9fe5580a].
As capital moves towards U.S. Treasuries, analysts are closely monitoring these developments, with expectations that 10-year yields could peak between 4.50-5.00% before potentially decreasing to 3.8% by the end of 2025 [b5836cfb]. David Krause from Marquette University has emphasized that we are witnessing the end of an era of cheap money, which will make borrowing more expensive for governments, companies, and consumers [cf352aa9].