U.S. Bond Sell-off Storm Intensifies, Wall Street Bets on 10-year Yield above 5%

TradingKey - With less than two weeks to go before Trump officially returns to the White House, the risks of reflation and the Federal Reserve's reduction in the number of interest rate cuts once again loomed over the capital markets. U.S. Treasury bonds and stocks were severely hit, and the soaring yield on the 10-year U.S. Treasury bond made the Federal Reserve's three interest rate cuts in vain.

On Tuesday, January 7th, the 10-year US Treasury yields rose to 4.695%, the highest since April 2024, and is currently reported at 4.675%. 30-year US Treasury yields rose to a high of 4.92%, the highest since the end of 2023, and is currently reported at 4.91%.

Although the Federal Reserve has cut interest rates three times since September 2024, with a cumulative reduction of 75 basis points, the 10-year US Treasury yields have soared by more than 90 basis points.

Deutsche Bank reports that this is the second-worst performance of the benchmark 10-year U.S. Treasury bond in the 14 rate cut cycles of the Fed since 1966, second only to 1981 - which was the later stage when Paul Volcker, the "Inflation Killer", was vigorously reducing inflation.

U.S. bond sell-off intensified, interest rates higher behind is still a few 'cliché' reasons: Strong U.S. economic data has weakened the necessity for the Federal Reserve to cut interest rates; the policies of the president-elect Trump, such as comprehensive tariffs on foreign countries and tax cuts at home, have pushed up the potential inflation risks, etc.

Data released on the 7th showed that the ISM Services PMI index in the United States rose unexpectedly to 54.1 in December, the highest since the beginning of 2023. The JOLTS job openings in the United States rose to 8.098 million in November, a six-month high.

According to CME, traders are betting that there may be only one interest rate cut at the June meeting during the whole 2025. The dot plot of the December meeting last year showed that FOMC policymakers expected two interest rate cuts this year.

Deutsche Bank believes that the sell-off in the U.S. Treasury bond market has reached an "extreme" level at present, but the sell-off is still not over, as the lower term premium may still rise.

Deutsche Bank projects the yield on U.S. Treasury bonds may still rise by 40 basis points. Jim Bianco, the founder of Bianco Research, expects that the average yield on the 10-year U.S. Treasury bond will reach 5.23%. Experts from ING Groep NV expect that 5.5% is possible. T. Rowe Price recently expected it to rise as high as 6%.