The New York Federal Reserve's 10-year term premium estimate has surged this year, crossing the half-percentage point threshold for the first time since 2014. This increase signals heightened risk perceptions among investors, despite the Federal Reserve's efforts to cut interest rates. The Fed's rate cuts have not prevented a substantial rise in the 10-year yield, which has climbed by 1% while the Fed slashed rates by the same margin. This discrepancy highlights significant concerns about potential economic threats on the horizon.
Amidst this backdrop, the US yield differential has become a focal point, influencing currency movements such as the EUR/USD, which traded above 1.0300 on Thursday. This reflects growing attention on the widening yield curve between the two- and 30-year Treasury yields, now at its broadest in nearly three years. Such an expansion suggests a marked increase in the risk premium demanded by fixed-income investors, attributed largely to uncertainties surrounding political and economic policies, often referred to as Trump Risk.
The 10-year US Treasury bond yield, after reaching a multi-month high of over 4.7% on Wednesday, experienced a correction. However, the rise in US yields remains pronounced, with the risk premium standing 50 basis points above the average of the past decade. The reemergence of the term premium, largely absent from markets for over ten years, underscores investor wariness about future economic conditions.
In a related development, Bitcoin US spot Exchange Traded Funds witnessed an outflow of over $568 million on Wednesday, indicating waning demand. Concurrently, gold prices have extended their weekly recovery, reaching above $2,670, their highest since mid-December. These movements suggest a shift in investor sentiment towards safer assets amidst market volatility.
Federal Reserve officials appear acutely aware of these challenges. Recent minutes reveal hesitation among some members regarding whether inflation has been effectively tamed. The central bank has opted to avoid a legal confrontation with former President Donald Trump and has prioritized other responsibilities while maintaining its membership role. The bond market's response—often characterized by vocal opposition from bond vigilantes—raises questions about the Fed's accountability in addressing these economic concerns.
Fed Governor Christopher Waller acknowledged the uncertain economic landscape, admitting uncertainty about future developments. Meanwhile, US dollar gains have been limited by retreating bond yields, allowing the currency pair to maintain stability as market attention shifts towards forthcoming Federal Reserve communications.