The Fed might be headed for a more dovish shift in 2026 but Treasury yields may stay underpinned regardless. And that's not a good recipe for risk trades, even if the early positioning flows today might point to a more optimistic picture for equities to start the year. As much as stocks are hoping for another rip higher, the bond market is one to keep an eye out for just in case.
So far today, 10-year yields are shooting higher to around 4.18% currently. The high earlier touched 4.195% and that comes close to testing the crucial 4.20% mark - one that has limited the bond selling since September at least.
However, 30-year yields in the US have now jumped up to 4.87% today. And that is the highest since early September last year. So, why are the bond vigilantes going back at it again if interest rates are supposed to be coming down?
I would argue that a strong reasoning for that is it's all tied to US debt and fiscal considerations. With Trump's administration pushing for a record amount of debt issuance, it continues to flood the market with more bonds. And for one, that brings us to a simple supply versus demand argument in why prices are falling and yields are rising.
But amid fiscal worries and the fact that the US is going to keep seeing a high budget deficit, the risk and term premium for holding US debt is going to keep seeing upwards pressure. And that's quite a reasonable argument to imagine given that yields are continuing to push up despite cooling economic data, in particular as reflected in labour market conditions.
With 30-year yields potentially slowly creeping back towards the 5% mark, that is one that could start to rile up risk trades once again as we look to start the year. So, don't just think that market sentiment is looking rather easy-going with S&P 500 futures up 0.4% and Asia being off to a decent start to the new year today.
