Bond vigilantes make their return

The start of the year has been hectic due to the multitude of new elements to digest before the presidential inauguration. On the macroeconomic front, economic data was better than expected in the United States. The jobs report, retail sales and ISM indices all surprised to the upside. The US economic surprise index experienced a strong rebound after a decline in December. The latest GDPNow from the Atlanta Fed estimates growth of 2.7% in Q1.

In terms of inflation, US data remains high. The “prices paid” component of the two ISMs was higher than expected, for services it even reached its highest point since February 2023. The potential introduction of customs duties by the Trump administration could further increase prices. price of goods.

Finally, the term premium is rebuilt. This is the compensation that investors require to bear the risk that rates may fluctuate over the life of the bond. It has increased by 90bps over the last 3 months. This, combined with the dramatic increase in Treasury bill issuance in 2024 which is expected to be renewed this year, suggests that rates markets will be more volatile in 2025.

The December Fed minutes highlight a shift in sentiment toward inflation. Given the growing uncertainty, an extended pause is now planned, with a 25bps rate cut expected by mid-year.

The US 10-year rate is approaching the 5% threshold. The recent increase is due to an increase in the term premium. This is reminiscent of 2023 when rates rose sharply after the Treasury announced an unexpected rise in new issuance, sparking investor concern about the trajectory of debt and deficits.

The question now is whether long-term rates will continue to rise. The rise in US rates and inflation expectations after the election resembles what was seen in 2016, when expectations of tariffs, tax cuts and an easier regulatory environment pushed rates higher. the increase.

The 5% level is considered an important psychological barrier, and any crossing could raise concerns about a move towards sustainably higher rates, for which risky assets and the broader economy may not be well prepared. .

A return of 5% would be a buying opportunity