Treasuries Begin 2025 with Measured Rally, Economic Resilience Takes Over
As the new year gets underway, Treasuries have begun to show signs of economic resilience, a shift from the measured rally seen at the start. Low jobless claims, heavy corporate bond sales, and rising oil prices are some of the key indicators that point to an economy on the rise.
The past year saw support from three Federal Reserve interest-rate cuts, but indications that economic strength may forestall additional moves have offset this support. Yields across maturities reached session lows at the beginning of US trading, only to become narrowly mixed across maturities by late in New York. This is a significant shift from the previous year's trend.
One of the key factors contributing to the measured rally and subsequent resilience is the unexpected drop in new jobless claims. These claims have fallen to an eight-month low, indicating that the labor market remains strong despite expectations of economic slowdown. Furthermore, the price of crude oil has surged by more than 2% to its highest level since October, adding further fuel to the economic fire.
In addition to these indicators, corporate bond sales are also on the rise. Ten companies have lined up offerings for the first session of the year, a testament to investor confidence in the economy. This is a significant development, as it indicates that companies are willing to take on debt and invest in their businesses despite concerns about economic uncertainty.
Market Outlook: Risks Ahead
As we move into the new year, there are several risks that investors should be aware of. The January employment data will be crucial, and any surprises in this report could have a significant impact on market sentiment. Additionally, the auctions of three-, 10- and 30-year debt are set to take place next week, which could also influence market direction.
The Treasury Department has announced that these auctions will be held a day earlier than normal, starting Monday. They will conclude before the National Day of Mourning in honor of former President Carter on January 9th. This timing is notable, as it may impact investor behavior and sentiment ahead of this important event.
Despite the potential risks ahead, market strategists generally favor short-term Treasuries over longer-dated tenors. They anticipate that President-elect Donald Trump's policies may lead to higher inflation and wider federal deficits, which would make long-term bonds more vulnerable to interest rate changes.
Yield Curve Steepens as 2024 Comes to a Close
Looking back at the past year, we can see that most Treasury yields climbed in 2024. The two-year tenor was the exception, declining by less than a basis point. However, five- to 30-year yields rose by at least half a percentage point, causing price erosion that was offset by higher coupon income than in previous years.
The yield curve steepened as a result, with the 10-year exceeding the two-year and the 30-year topping the 5-year by more than half a percentage point. This is the first time since 2022 that these yields have been so far apart, indicating a significant shift in market expectations.
Conclusion
As we begin the new year, it's clear that Treasuries are showing signs of economic resilience. Low jobless claims, heavy corporate bond sales, and rising oil prices all point to an economy on the rise. However, there are risks ahead, including crucial January employment data and auctions of three-, 10- and 30-year debt.
Market strategists generally favor short-term Treasuries over longer-dated tenors, anticipating that President-elect Donald Trump's policies may lead to higher inflation and wider federal deficits. The yield curve steepened in the past year, with most Treasury yields climbing as a result of price erosion offset by higher coupon income.
As we move forward into 2025, investors would do well to keep these factors in mind when making investment decisions. By understanding the underlying drivers of market trends and sentiment, they can make more informed choices about their investments.