US yields hit 14-month high amid auctions and tariff speculation

(Bloomberg) — The yield on 30-year U.S. Treasuries rose to its highest level in more than a year in a session that gave investors a taste of how President-elect Donald Trump is could disrupt financial markets in the coming months.

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The long-term bond rate climbed 5 basis points on Monday to around 4.86%, the highest since November 2023. It was propelled in part by supply pressure as demand was weak For the first of three Treasury auctions this week and on the 22nd, investment-grade corporate bond offerings competed for investor cash.

With auctions of 10- and 30-year Treasury securities scheduled for Tuesday and Wednesday, each a day earlier than usual due to former President Jimmy Carter's state funeral on Thursday, yields rose to session highs during the US morning after Trump refuted the Washington Post report that a narrower tariff plan is under consideration. Fears that trade protectionism will fuel inflation have weighed on bonds since Trump's election in November.

You have a huge amount of debt coming into the market, Gregory Peters, co-chief investment officer at PGIM Fixed Income, said on Bloomberg TV. The supply just keeps coming. Added to this may be the fact that inflation is a little more rigid or reversing, which puts more pressure on bond markets.

The three-year bond auction returned 4.332%, more than a basis point higher than its yield just before the auction, a sign that demand did not meet expectations.

Longer-dated bonds have been hit hardest in recent weeks. The 10-year yield has risen about 50 basis points since early December to 4.64% on Monday, its highest level since May. That's about 35 basis points higher than two-year rates, the largest premium since May 2022.

Jim Bianco, founder of Bianco Research, said the 10-year yield could reach 5%, a level it last reached in October 2023, which was the highest since 2007.

We are in a secular rise in interest rates, Bianco said on Bloomberg Television. This didn't end 15 months ago.

The gloomy outlook for Treasuries was echoed by 57% of the 553 respondents in the latest MLIV Pulse survey, who expect higher Treasury yields early in the year. Those expectations come after the Federal Reserve's December meeting showed that policymakers had reduced their forecast for interest rate cuts to just two-quarters of a point this year.

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The impact of rising yields is also spilling over to other asset classes. Morgan Stanley strategists say rates are the most important variable to watch in early 2025 for stocks. On the foreign exchange markets, the rise in rates has stimulated the dollar, which has just recorded its strongest annual increase in almost a decade.

What Bloomberg strategists say…

Bond investors could face a lose-lose dynamic in Washington. Smooth passage of major spending plans would be detrimental, as would political chaos that would bring debt ceiling anxiety back into play.

Garfield Reynolds, MLIV strategist. See the full note here.

The new Trump administration has made clear that it will work to implement many of its key legislative policies as quickly as possible. House Speaker Mike Johnson said Sunday that a comprehensive bill would be ready for Trump to sign by May and possibly late April.

Any resurgence in inflation would likely slow the pace of the Fed's rate cuts. Comments from Fed officials over the weekend, including San Francisco Fed President Mary Daly, reinforced that view, and futures traders expect policymakers to be able to maintain the rates stable until June.

The looming battle over the US debt ceiling adds to this gloom. The Treasury is preparing to use special accounting maneuvers to avoid exceeding it starting in mid-January, the first step in what will likely be a prolonged fight over fiscal policy, given Trump's push to raise or eliminate the ceiling.

A hawkish Fed meeting in December and concerns about the U.S. fiscal situation led to upward pressure on rates, said Mohit Kumar, chief economist at Jefferies International.

–With assistance from Michael Mackenzie, Carter Johnson and Kristine Aquino.

(Adds bond auction result to fifth paragraph.)

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