US Bond Market in Turmoil Anticipates Jobs Report for Hopeful Recovery -

The troubled US government bond market is bracing for insights from the December employment report set to be released on Friday.

Despite a rise in bearish positions, some investors and strategists suggest that the notable increase in yields since mid-September implies that strong data may not impact the market negatively as weak data might deliver a positive boost.

With yields nearing 5%—a threshold that the 20-year bond exceeded this week for the first time since 2023—we might be overestimating concerns about higher inflation under President-elect Donald Trump, who will take office on January 21. The robust demand observed in Wednesday’s auction of 30-year bonds, which resulted in the highest yields in over a decade, indicates that investors continue to find value in the market.

“We’ve seen a significant sell-off in Treasuries, with yields climbing almost uniformly since early December,” stated Subadra Rajappa, head of US rates strategy at Societe Generale. “It seems the market could benefit from a breather ahead of the presidential inauguration.”

The yield on the benchmark 10-year note briefly exceeded 4.72% on Wednesday, reflecting an increase of over one full percentage point since mid-September, coinciding with the Federal Reserve’s initiation of its first of three interest-rate reductions. A Bloomberg index tracking Treasury returns has dropped by 0.4% so far this year.

The reduction in percentage points was designed to protect the job market from excessively high rates following an increase of over five percentage points in the past two years. However, combined with the election results, they have reignited inflation concerns, leading to diminished expectations for further rate cuts this year.

Rajappa noted that the 10-year yield could potentially rise to 4.75% if the December jobs data is strong. However, hitting 5% would likely require concrete policy actions from the incoming administration.

If, conversely, the unemployment rate rises or job creation is weak, “you may witness a further decline in yields,” Rajappa remarked. “It may indicate that the market has overestimated the removal of many anticipated Fed rate cuts for this year.”

The average forecast in a Bloomberg survey anticipates a 165,000 increase in employment for December, a dip from the 227,000 in November, with expectations that the unemployment rate remains steady at 4.2%.

“The economy continues to be incredibly resilient,” remarked Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “However, I have concerns as it appears inflation is on the rise again,” she added, expressing her belief that long-term Treasury yields have not yet reached their peak.

Strength in the labor market influenced the Federal Reserve’s decision to revise its outlook for the pace of rate cuts in December. The latest quarterly forecasts revealed a median expectation of two quarter-point cuts in 2025, down from four previously.

Worries about slow progress towards lower inflation were underscored in the minutes from the December meeting that were released on Wednesday. Data on consumer prices, due on January 15, is expected to show a third consecutive month of acceleration.

Traders in swaps are currently forecasting only around 40 basis points of easing from the Fed for all of 2025.

The central bank’s recognition of ongoing inflation and the need for caution regarding future rate cuts has caught the market off guard, noted Robert Tipp, chief investment strategist at PGIM Fixed Income. Simultaneously, “there may be a swift move to extend tax cuts” in addition to other fiscal measures under Trump.

What Bloomberg Strategists Say

“A chart depicting the average yield movement of 10-year Treasuries after the first Fed interest-rate cut has circulated, suggesting that yields typically decline post-cuts. Nevertheless, 1998 emerges as a notable exception, indicating that an extension of the recent sell-off is highly possible. Rate options reveal a strong likelihood of only one more rate cut, along with a 30% chance of rate hikes before year’s end.”

— Ira Jersey and Will Hoffman, Bloomberg Intelligence

Goldman Sachs Group Inc. analysts forecast lower yields following the December employment report.

“We believe that Friday’s jobs report may ease some of the recent upward pressure on yields, as we expect a rise of 125,000 in nonfarm payrolls for December, which is below consensus estimations,” a team including Jenny Grimberg stated in their analysis. “Nonetheless, longer-dated yields might remain relatively high due to persistent investor concerns regarding the outlook for US government debt, which we find troubling.”

Investors holding long-term Treasury bonds—who sustained an 8% loss in 2024 due to rising yields—have reported an additional 2% loss this year, as indicated by a Bloomberg index. The broader market recorded a gain of less than one percentage point last year and has declined 0.4% so far this year.

Recent changes in open interest for 10-year US Treasury note futures show a growing interest in betting on even higher yields.

Trump’s proposed tariffs and plans to deport illegal immigrants are considered “negative supply shocks” that the market is presently pricing in, according to Freya Beamish, chief economist at TS Lombard.

“We prefer not to interfere with the ongoing increase in US Treasury yields, as it may signal the market’s transition towards a new regime,” she noted.

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