The U.S. 10-year Treasury yield has been stuck in the same, repeating pattern between 4% and 4.1%. Currently, it’s just flat-lining at 4.06%. That relative stability is an indicator that the market is on guard. It seems like investors don’t want to be the one to push yields through the 4.1% ceiling. Prevailing economic indicators are playing a role in this prevailing trading range, making for a complicated set-up for any potential breakout in Treasury yields.
Recent reports, including the U.S. ADP employment report for November, showed a decline of 32,000 jobs, signaling potential weaknesses in the labor market. Our full Challenger report will be released this Thursday. This report is likely to provide some of the best direction on future job trends and could shape the market’s expectations. These competing signals have led to a deep confusion about the likely path for U.S. 10-year yield.
Some analysts think any decline under the 4% threshold will indeed be fleeting. They expect this trend to continue even into the beginning of the new year. This emergence of a new movement would likely require a fundamental shift in economic circumstances to be seen as long-term viable. If yields do move above the 4.1% level, it would suggest a seismic change in the market’s structure. This amendment has the potential to set the stage for major changes that go all the way out to 2026.
Recent inflation data have also played a role. As a result, export prices increased by 3.8% for the four-month period, the largest rate of increase in nearly three years. In comparison, the prices of imports in September were vastly restrained, making no significant jumps either on a month-on-month or year-on-year basis. This inconsistency in inflation rates makes the Federal Reserve’s task of steering monetary policy through constantly changing economic signals even more difficult.
The next Personal Consumption Expenditures (PCE) data, due out this Friday, could move market sentiment in a big way. If this report does show a month-on-month increase of 0.1%, it might strengthen the argument for keeping yields below 4%. If inflation truly is getting ready to break out, for example, that would put upward pressure on yields. This would push to the top of the current trading range’s ceiling.
Yet last month, we recorded over 120,000 planned layoffs from companies. Low jobless claims during this period calmed fears of an expected spike in unemployment. In recent months, the U.S. 10-year yield has gone negative in September, August and June. This is in sharp contrast to last year, when there were no negative prints over the same time frame. This significant swing further highlights the continued uncertainty in the yield environment.
The market seems to be rewarding the 4% to 4.1% range these days. There are pretty darn good reasons that continue to make driving yields much below 4% very much absent. Investors will continue to be vigilant of future economic data and what it means for monetary policy.