A surge in US Treasury yields may continue to rise as investors await the Federal Reserve’s next move after a strong jobs report reinforced expectations of higher interest rates.
The recent increase in Treasury yields has been driven by economists’ forecast that interest rates will stay high for longer. Friday’s jobs report showed 256,000 new jobs added in December, above forecasts and bolstering market expectations that the Fed would maintain elevated interest rates to curb economic overheating.
However, the data also raised concerns about inflation, which remains above the Fed’s 2% target. Traders now expect the central bank to wait until at least June to reduce its policy rate, pushing back the expected rate cut from May to March.
Concerns over a rebound in inflation have led to speculation that the Fed may hike interest rates next. This scenario would be unthinkable just months ago, when investors expected interest rates to decline to around 2.8% by the end of this year.
Longer-dated US Treasury yields jumped to their highest levels since November 2023, with the 10-year yield reaching a high of 4.79%. The yield curve has steepened in recent weeks, indicating that investors expect interest rates to remain high due to ongoing economic resilience.
Higher yields could also dampen investor interest in stocks and other high-risk assets by tightening financial conditions and increasing borrowing costs for businesses and individuals. Analysts warn that the 5% yield threshold may trigger asset allocation shifts, as seen in late 2023 when benchmark 10-year yields reached 5% for the first time since 2007.
The S&P 500 fell 1% on Friday, with stocks tumbled as upbeat economic data propelled yields higher. Analysts predict that the 10-year yield will remain above 4% this year, making it challenging for the stock market.
Source: https://www.reuters.com/markets/us/jobs-report-fuels-treasury-yield-surge-markets-brace-5-threshold-2025-01-10