The U.S. 10-year Treasury bond market has reached a boiling point. This is most clearly seen at the 61.8% Fibonacci extension level, where price swings are clustered around 3.86% and 4.59% with a prominent peak at 4.12%. The current trend indicates a price reversal at 4.60%. It fits like a glove with the 78.6% Fibonacci retracement level of the past drop from 4.80% to 3.86%. The short-term outlook for the manufacturing base and job growth has soured. This expected drop will have a major impact on the competitive bond market in the months ahead.
Michael Delgado, Senior Portfolio Manager at Pimco, has been warning investors to reevaluate their long-duration U.S. Treasury exposures. He further emphasizes that this current economic environment requires an underweight strategy, especially as inflation continues to be a long-term bump in the road.
“We recommend underweighting long-duration positions. The Fed’s inflation fight is not yet won, and core services inflation remains elevated. We favor floating rate notes (FRNs) and short-dated TIPS to protect against unexpected rate hikes.” – Michael Delgado, Senior Portfolio Manager at Pimco
Next month’s job growth report for May is going to show a thrilling jump in employment. Experts project a net increase of around 120,000 jobs! This is a drop off from the 177,000 jobs added in April. Lingering issues in the labor market may come to bear on the Treasury bond market.
Further, the construction activity continues demonstrating signs of slowdown, standing under contract for the third month in a row. The decline is largely due to a dramatic drop in private sector investments. These concerns over the U.S. economic health and a potential decrease in U.S. Treasury bonds’ value.
The May ISM manufacturing report gives some evidence that things are still very volatile in the U.S. industrial sector with many pressures weighing in. Supply chain recalibrations, as well as softening demand in the United States, are considerable factors. Compounding that, tariff-driven cost pressures have the potential to further exacerbate these challenges. All of these factors led to spending contracting for the third month in a row. This worrying trend may be predicating an even bigger slowdown in private investment.
The future of U.S. 10-year Treasury bonds in 2025 will largely hinge on these five important economic indicators. Congressional and administrative actions, particularly in support of trade policy agreements, will be key. Equity investors are licking their chops over these advancements as they would greatly impact the path of interest rates and the bond market at large.
The market, as it tends to do, is trying to stay ahead of all these shifting conditions. Analysts are tempering expectations, wary of continued downturn in the manufacturing sector. The expected job creation numbers and uptick in construction activity will definitely influence investor confidence and market direction in the short term.
The combination of plateauing construction activity and a looming decrease in job growth poses a serious threat to continued economic momentum. Financial analysts warn that without a robust recovery in these sectors, the U.S. 10-year Treasury bond market may encounter additional headwinds.