TREASURIES-US yields edge higher in 2026's first trading day

By Matt Tracy

Jan 2 (Reuters) - U.S. Treasury yields edged higher in the New Year's first day of trading, as market participants look to next week's employment reports for signs of the economy's direction in 2026.

The yield on 10-year Treasury notes US10YT=RR was up 4.1 basis points to 4.196% on Friday. Last year marked the first year since 2020 that there was a yearly drop in the 10-year yield.

The yield on the 30-year Treasury bond US30YT=RR was up 4.2 bps to 4.872%.

A closely watched part of the U.S. Treasury yield curve that measures the gap between yields on two- and 10-year Treasury notes US2US10=RR and provides a gauge of economic expectations was at 71.1 basis points.

The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 2.7 bps at 3.481%.

SHORTER-TERM YIELDS FELL THE MOST

Shorter-term Treasury yields fell by the most at the end of 2025, according to a report on Wednesday from Tradeweb. The two-year yield was down by 78.5 bps compared to last year’s close of 4.252% earlier in trading, "the most of any Treasury yield, including bill yields," Tradeweb said.

Yields overall fell over the course of 2025 as the U.S. Federal Reserve has gradually made cuts to its key interest rate, in a shift from its largely hawkish stance on rates between 2020 and 2024.

Market bets on the odds of a cut in a key interest rate at the Federal Reserve's January meeting were last at 14.9%, according to CME Group data.

The U.S. dollar five-year forward inflation-linked swap USIL5YF5Y=R, regarded by some in the market as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.453%.

Data on Wednesday, the last trading day before the New Year holiday, pushed yields higher after initial jobless claims for the week ended December 27 were lower than economists' estimates.

Market participants are watching for any data points that could point to a rate cut in January, including next week's employment and unemployment reports.

Eligible financial firms on Wednesday borrowed a record amount from the Federal Reserve Bank of New York's Standing Repo Facility, in a final borrowing push before the New Year.

They borrowed $74.6 billion from the Fed, which they collateralized with $31.5 billion in Treasury bonds and $43.1 billion in mortgage-backed securities.