Insights

US Treasuries 

• The 10-year Treasury yield is currently 4.29%, 10 basis points higher on the week. 10-year bonds traded in a 10 basis points range this past week (4.13% to 4.23%).  
• 2-year Treasuries are at 3.59% this morning, 4 basis points higher since last Monday. 

Treasuries sold off overnight, with the 10-year yield higher by about 6 basis points, following higher Japanese long-end yields. Japan 10-year bonds are at 2.35%, higher by 0.10%, Japan 30-year bonds at 3.85%, higher by 0.27%. Traders and investors are selling Japanese government debt as the Japanese government outlines tax cuts and fiscal stimulus. 

Alongside the Japanese bond sell off, Treasuries are under pressure with “sell America” sentiment taking hold over President Trump’s push for Greenland - both Treasuries and the dollar trading off, gold and precious metals improving.   Trump’s renewed push for Greenland includes a proposal to impose additional 10% to 25% tariffs on EU countries that oppose the US acquiring Greenland.  Treasury Secretary Scott Bessent is urging calm suggesting that selling Treasuries and other US assets “defies any logic” and that the Trump call for additional tariffs is a negotiation position rather than a firm policy shift. Trump speaks at the World Economic Forum in Davos tomorrow. 

For most of last week, 10-year Treasuries traded in a range around 4.15%-4.20% with yields improving after the CPI inflation report printed slightly better than forecasted and then again after headlines of a possible United States intervention in Iran.  Yields moved higher out of the range on Friday after President Trump said that he prefers to keep Kevin Hassett in his current role as the National Economic Council director, suggesting that Kevin Warsh (or someone else) would be named to replace Fed Chairman Powell when his term ends in May.   

Last Week’s Economic Data (Selected) 

The data last week was generally positive for the economy – firm consumer demand, steady labor market, and a modest improvement in inflation.   

Hard Data 

• Consumer Prices (CPI): Headline CPI for December printed at +0.3% for the month, in-line with the forecast. Core CPI printed at +0.2%, below the pre-announcement estimate.  For the year, headline CPI printed at 2.7%, Core CPI came in at 2.6%.  
• Producer Prices (PPI): Headline PPI for November printed at +0.2% MoM, in-line with the forecast. Core PPI printed at +0.0%, versus the forecast of 0.2%.  As of November, YOY headline PPI printed at 3%, Core PPI also came in at 3%.  
• Retail Sales: Retail sales was higher by +0.6% for November, versus -0.1% the previous month and 0.5% expected.  
• ADP Weekly Employment Report: Private payrolls increased 11,750, versus 11k the previous week, signaling continued labor market strength.  
• Weekly Initial Jobless Claims: Jobless claims fell to 198k, below both the prior week (207k, as revised) and consensus estimate (215k), indicating a firm labor market.  
• New Home Sales: October (delayed new home sales printed at +737k, above the 715k forecast.  
• Existing Home Sales: Home resales printed at 4.35 million for December, above the forecast (4.22 m) and higher than the previous month (4.14 m, as revised).  
• Business Inventories: Inventories printed higher at +0.3% for October, in line with the prior month, as revised. 
• Import & Export Prices: Import prices rose +0.1% and export prices rose +3.3%, marking a rebound from prior declines.  
• Industrial Production: +0.4% increase for December, above expectation and in line with the prior month as revised.  
• Manufacturing Production: Factory output increased 0.2%, exceeding forecasts and signaling improved production momentum.  
• Capacity Utilization: Utilization printed at 76.3% for December, slightly above the 76.1% prior month as revised.

Soft Data (Surveys)  

• Fed Beige Book – the regional Federal Reserve Bank surveys of economic conditions across the 12 Federal Reserve districts presented very little change in activity. NY Fed noted a decrease, 3 districts noted no change, 8 of 12 districts saw only slight to moderate increases in economic activity.
• NY Fed Services Business Activity: January services activity improved slightly to -16.1 versus the prior reading at -20.
• NAHB Housing Market Index: Builder sentiment printed at 37, versus the 40 estimate and remaining below the expansion threshold.

Fed Monetary Policy  

Odds are that the Fed remains on hold at the January 28^th FOMC meeting – the employment report two weeks ago was mixed with the unemployment rate moving lower to 4.4%, CPI improved but still too far away from the Fed’s 2% target.  

The “Fed speak” last week coalesced around “hold‑for‑now.”  Fed officials Williams and Bostic emphasized that policy is well positioned and patience for further rate cuts is warranted.  Fed vice chair Bowman indicated that she is prepared to lower rates further unless employment improves. Fed member Meran, appointed by Trump last summer, continues to seek rate cuts of over 1% or more. 

At any time over the next few weeks, President Trump is expected to nominate a successor to Fed Chair Jerome Powell when his term expires in May. Last Friday, Trump indicated he prefers to keep Kevin Hassett in his current role as Director of the National Economic Council, signaling that Kevin Warsh (or possibly another candidate) could be selected to replace Powell. 

Hassett is generally viewed as more politically aligned and likely to pursue more accommodative monetary policy, while Warsh, a former Fed governor, is seen as more institutionally credible and more focused on the Fed’s dual mandate of price stability and full employment. While either candidate would likely begin with a more dovish posture (consistent with Trump’s stated preference), Warsh is viewed as more likely to pivot toward restraint should inflation reaccelerate or the economy show signs of overheating. 

The overnight Fed Funds rate is 3.64% (target range 3.50%-3.75%).  As implied by the shape of the yield curve, the bond market sees virtually no chance of a rate cut on January 28th, a ¼ point rate cut in June or July and then the possibility of a 2nd ¼ point cut by year end. 

My Take on Longer Term Yields      

With 10-year Treasuries approaching 4.30%, I believe it to be oversold and should stabilize/improve from here.  It’s noteworthy however that 10‑year Treasury yields have broken out above the recent 4.10%–4.20% range driven by a possible reset on global yields and aversion to US assets due to President Trump’s renewed push to acquire Greenland. Further, a key driver for lower yields had been a weaker US labor‑market, yet the most recent data point to stabilization: the unemployment rate edged lower, Challenger layoffs declined, and weekly jobless claims remain subdued, with the four‑week moving average near 205k. 

While the latest CPI print was marginally supportive for bonds, inflation remains above the Fed’s 2% target and tariff‑related price pressures remain as a risk. We will see the delayed November PCE inflation print on Thursday, additional evidence of the direction of prices that will influence Fed policy.  

This Week’s Economic Data

The focus will be Thursday’s PCE inflation data and Q3 GDP (third read).  We will also receive data on housing activity and consumer confidence.  

The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.