Franklin Templeton has indicated that the 10-year U.S. Treasury yield could climb to 5% or higher as the U.S. government increases debt issuance to fund substantial deficits. Sonal Desai, Chief Investment Officer of Fixed Income at Franklin Templeton, mentioned that such a rise in yields to 4.5% to 5% is plausible. She further noted that if investors observe a significant increase in U.S. deficits, the benchmark yield could potentially exceed 5%.
This view aligns with warnings from J.P. Morgan Asset Management and T. Rowe Price, suggesting that Treasury yields may increase as investors begin to consider the implications of Trump's potential re-election on the bond market. Since the election, Treasury yields have been volatile as traders weigh whether the Federal Reserve can continue rate cuts amid expanding federal budget deficits.
U.S. Treasuries faced a sell-off recently, leading to a rise in yields across the curve. The 10-year Treasury yield was about 4.42%, up from 4.27% on the election day. It reached a high of 4.48% shortly after Trump's election results became apparent, marking the highest level since July.
Desai commented on the deficit concerns, stating that whether yields break 5% would depend on the extent of deficit expansion and emphasized that the economy might withstand such levels. Ahead of the U.S. Consumer Price Index (CPI) release, short positions grew as traders anticipated policies from Trump that could reignite inflation.
Traders are increasing bets on a further decline in the U.S. Treasury market. Recent data revealed that open interest in two-year Treasuries has risen for the fourth consecutive day, indicating a buildup of bearish positions ahead of the anticipated inflation data.
Two-year note futures saw an increase of about 132,000 contracts over four days, translating to significant risk additions per basis point in the front-end sell-off. So far, short bets have focused on shorter-term securities like two-year and five-year notes.
As bond investors and Federal Reserve observers assess U.S. interest rate trends, inflation has re-emerged as a focal point. The likelihood of a December rate cut by the Federal Reserve remains narrowly above 50%. Scott Kleinman, Co-President of Apollo Global Management, mentioned that markets should not become complacent about current inflation and rates, warning that higher rates could persist longer.
TD Securities' rate strategists noted that investors appear to be reacting to recent Fed signals suggesting a more gradual approach to rate cuts. Insight Investment portfolio manager Nate Hyde commented that while the election results have added economic uncertainty in the coming years, it is not something the Fed can actively counter. Scott Johnson of Bloomberg Economics suggested that the upcoming CPI data might reduce expectations for a December rate cut, and stronger-than-expected figures could raise predictions for two-year Treasury yields before 2025.
David Rogal, Fixed Income Portfolio Manager at BlackRock, remarked that the bond market is preparing for stronger CPI data.
