- The 10-year Treasury yield is climbing toward 5% for the first time in years.
- Yields rose on concerns about strong economic data, inflation fears and political uncertainty.
- TD Securities’ rates head suggests a possible entry point between economic changes and rate changes.
The bond market is stealing the spotlight as we turn the corner into a new year that ranged in yields not seen since 2007. In October, yields only briefly hit 5%.
On Tuesday, the 10-year Treasury traded around 4.79%, near the key psychological level of 5%. The 30-year-old rose even closer to 4.98%.
The increase comes after market expectations for a growing economy and fears of a rebound in inflation after December payrolls showed 256,000 jobs were added, well above the forecast of 164,000. That signals the U.S. economy is either accelerating or stabilizing at a stronger level, said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, who believes it’s likely the latter.
While the rise in yields may initially be blamed on stronger economic data, it comes as no surprise to some money managers and economists. Expectations of the 10-year hit and even a 5% miss were on their list of things to watch out for in 2025.
Markets had discounted the impact of corporate tax cuts and stricter immigration laws that could widen the deficit and worsen inflation as early as October. Longer-dated bond yields rallied higher in the election as the likelihood of a Trump victory became increasingly accepted. The quick Republican victory pushed the 10-year yield from an Election Day close of 4.29% to a higher 4.76% the next day.
In October, Christophe Barraud, chief economist and strategist at Market Securities Monaco, who has an astonishing track record for accuracy, said a Republican purge would gradually move the 10-year to 5% as investors seek a higher term premium to compensate Duration risks from what could become Washington’s manufactured uncertainties. It’s a worry that the bond market knew all too well it could play.
Where to jump
Now that we’re here, the question is whether it’s a buying opportunity. The answer is yes—higher yields provide an attractive starting point for returns, and because bond prices rise when yields fall, lower yields would increase the profits investors can make by selling later. However, the range is wide and perhaps volatile for those aiming for an entry point into longer duration bonds.
In a November interview with Business Insider, Jimmy Chang, CIO of the Rockefeller Family Global Office, warned of a strong reaction from the bond market that would push yields higher and warned investors not to jump right in. the tempting threshold of 5%, citing unpredictability concerns near technical resistance points. He also expressed concern about bond vigilantes, a general term representing the collective psyche of investors who may sell or avoid buying bonds as a means of protest against bad fiscal, monetary or inflationary policies. He advised buying only after there are stabilization signals, either below or above the threshold.
Meanwhile, the 10-year is already attractive at 4.74%, according to Goldberg. For rates to continue moving higher, he believes one of three things must happen: The market must price in rising rates, which is a high bar because it would create a massive economic shift. Or, the deficit would have to widen well above the $1.8 trillion in 2024. But a narrow Republican majority would likely prevent a large increase in windfall spending. Finally, the fees would have to be much higher than expected. While there is no exact target for where the tariffs could land, Goldberg believes that if the Trump administration pursues, say, a 60% tariff on China, 10% on Europe and adds Canada and Mexico to the list, that could raise inflation expectations. . .
TD Securities’ target rate is 4.30%, a technical point that is roughly halfway to the December selloff, Goldberg said. But that’s also because he doesn’t expect the US economy to fall off a cliff anytime soon. So, unless the market expects the Fed to cut interest rates too significantly, yields could continue to stay in the mid-to-low fours for some time. Its current target is no rate cut in the first half of the year, followed by four cuts for a total of 100 basis points.
Finally, Goldberg suggests leaving some dry dust for a potential ceiling of 5.05% if yields continue to rise amid near-term wage data and inflation remaining above expectations. To play this hand, investors should watch closely for changes in direction that could signal economic acceleration or stabilization. On Tuesday, the December producer price index (PPI), a measure of wholesale prices, rose 0.2% on a monthly basis to 3.3% from a year earlier. It’s a reading that’s below economists’ expectations of 3.5%, which may be a sigh of relief. The next number to watch will be the consumer price index in December.
“Once the momentum looks like it’s waning, that kind of bearish momentum or the move higher in rates is waning, I think a lot of real money investors are going to jump in because the levels are very attractive long-term if you expect the Fed to cut rates at some point later this year,” Goldberg said.
