The chart below illustrates the difference between U.S. government bond yields for 10 years and 2 years. The 10-year government bonds represent the rate the United States pays to borrow money over a decade, while the 2-year bond yields reflect the return on U.S. Treasury bonds maturing in two years.
Recently, U.S. Treasury bond yields for 10 years have risen significantly, despite the Federal Reserve lowering its target interest rate. This is an unusual trend, as Federal Reserve rate cuts typically lead to declining yields. The increase in yields is attributed to two main factors: stronger-than-expected economic growth and heightened uncertainty in the macroeconomic environment.
The U.S. economy has exceeded growth expectations for 2024, with projections rising from 1.2% to 2.7%. This has pushed yields higher, as expectations for future Federal Reserve rate cuts have diminished.
Additionally, uncertainty regarding the Federal Reserve’s future interest rate policy and the potential impacts of new government policies have further contributed to the rise in yields.
Despite these factors, the recent bond sell-off is not linked to concerns over U.S. deficits, as long-term bond yields have remained largely stable. Projections suggest minimal potential for yield increases in the near future, as it is unlikely the Federal Reserve will raise interest rates soon.
Economic indicators, including a slowing labor market and weak wage growth, suggest that the current upward trend in yields may be nearing its peak. Analysts have warned that market volatility following the inauguration of U.S. President Donald Trump could lead to further uncertainty in financial markets.
On another front, the Bank of Japan (BOJ) is considering raising interest rates during its scheduled meeting on January 23–24, contingent on improvements in Japan’s economic and financial conditions and barring any disruptions from U.S. economic policies. Governor Kazuo Ueda noted that the timing of any rate hike depends on factors such as U.S. policies and Japan’s wage negotiations, which show promising prospects for wage growth.
Recent statements have driven up the yen and Japanese bond yields. Market expectations are divided between a rate hike in January or March, with economists predicting that market volatility following the inauguration of U.S. President Donald Trump may delay the decision. The BOJ has already ended negative interest rates, raising short-term rates to 0.25% in July. UBS economists expect a 0.5% hike next week if no major market disruptions occur.
Technical Analysis of USD/JPY:
A continuation of downward price movement is likely as long as the currency trades below the key resistance levels of 157.15–158.60.
Nikkei 225:
The Nikkei 225 is currently trading within a narrow range, fluctuating between a low of 37,700 and an upper resistance level of 40,290. However, recent price movements indicate signs of weakness, potentially due to the BOJ’s shift towards a contractionary monetary policy. This shift, including potential rate hikes, is expected to negatively impact the stock market while driving yields higher in debt markets.
