The troubled US government bond market is looking forward to the upcoming 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 might imply that strong data could have a lesser negative impact on the market compared to the positive effect weak data would bring.

As yields edge closer to 5%—a threshold the 20-year bond breached this week for the first time since 2023—concerns regarding higher inflation under President-elect Donald Trump, who will take office on January 21, may be exaggerated. The strong demand observed during Wednesday’s auction of 30-year bonds, which provided the highest yields in over a decade, indicates that investors still find value in the market.

“We’ve seen a significant sell-off in Treasuries, with yields rising almost steadily since early December,” noted Subadra Rajappa, head of US rates strategy at Societe Generale. “It looks like the market could benefit from a break before the presidential inauguration.”

The yield on the benchmark 10-year note momentarily climbed above 4.72% on Wednesday, reflecting an increase of over a full percentage point since mid-September—when the Federal Reserve initiated its first of three interest-rate reductions. A Bloomberg index tracking Treasury returns has slipped by 0.4% this year.

The percentage-point cuts were aimed at protecting the job market from excessively high rates following a more than five-percentage-point rise in the prior two years. However, coupled with the election outcomes, these cuts have reignited inflation concerns, drastically reducing expectations for further rate cuts this year.

Rajappa mentioned that if the December jobs data is strong, the 10-year yield could reach 4.75%, though surpassing 5% may necessitate concrete policy actions from the new administration.

Conversely, should the unemployment rate rise or job creation numbers fall short, “you could see a further dip in yields,” she added. “It might seem that the market has overreacted by eliminating many of the Fed’s anticipated rate cuts for this year.”

The average forecast in a Bloomberg survey estimates a 165,000 increase in employment for December, down from 227,000 in November, with the unemployment rate expected to remain steady at 4.2%.

“The economy continues to show resilience,” commented Tracy Chen, a portfolio manager at Brandywine Global Investment Management. “However, I am apprehensive because it appears inflation is on the rise again,” she stated, asserting her belief that long-term Treasury yields have not yet reached their peak.

The strong labor market influenced the Federal Reserve’s decision to revise its perspective on the rate cut’s speed this year in December. The latest quarterly forecasts showed a median outlook of two quarter-point cuts in 2025, reduced from four previously.

Concerns regarding the slow progress towards lower inflation were highlighted in the minutes of the December meeting released on Wednesday. Consumer price data, set to be published on January 15, is projected to indicate a third consecutive month of growth.

Swaps traders are currently expecting roughly only 40 basis points of easing from the Fed for the entirety of 2025.

The central bank’s recognition of ongoing inflation and the necessity for caution in relation to future rate cuts has caught the market off guard, remarked Robert Tipp, chief investment strategist at PGIM Fixed Income. At the same time, “there may be a swift acceleration in efforts to extend tax cuts” alongside other fiscal stimulus initiatives under Trump.

What Bloomberg Strategists Say

“A chart depicting the average yield movement of 10-year Treasuries following the initial Fed rate cut has circulated, showing yields typically drop after cuts. However, 1998 stands out as a notable exception, suggesting that an extension of the recent sell-off is likely. Rate options indicate a strong possibility of just one additional rate cut, along with a 30% likelihood of hikes before the year concludes.”

— Ira Jersey and Will Hoffman, Bloomberg Intelligence

Analysts from Goldman Sachs Group Inc. foresee lower yields following the December employment report.

“We believe the jobs report on Friday may relieve some of the recent upward pressure on yields, as we expect a gain of 125,000 in nonfarm payrolls for December, which is below consensus expectations,” a team led by Jenny Grimberg noted in their analysis. “Nonetheless, longer-term yields may stay relatively elevated due to ongoing investor concerns about the outlook for US government debt, which we find alarming.”

Investors holding long-maturity Treasury bonds—experiencing an 8% loss in 2024 due to rising yields—have faced an additional 2% loss thus far this year, according to a Bloomberg index. The broader market saw less than a one percentage point gain last year and is down 0.4% this year to date.

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

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

“We prefer not to intervene with the ongoing escalation in US Treasury yields, as it may signify the market’s shift towards a new regime,” she observed.

© 2025 Bloomberg

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