- The 10-year Treasury yield is currently 4.24%, 7 basis points lower this past week. 10-year bonds traded in a narrow 8 basis point range this past week (4.22% to 4.30%).
- 2-year Treasuries are at 3.60% this morning, inching higher by 1 basis point since Tuesday (with the MLK Jr holiday on Monday).
Treasury yields opened higher on Tuesday, driven by rising Japanese rates and a wave of “sell America” sentiment after President Trump’s push to acquire Greenland, which included potential 10–25% additional tariffs on EU nations opposing the plan. Yields later retraced some of the move after the President’s remarks at the World Economic Forum in Davos, where he downplayed the prospect of forcibly taking Greenland and stepped back from the threat of new EU tariffs, easing market concerns.
Last Week’s Economic Data (Selected)
The past week’s data reflected generally solid underlying economic conditions but with signs of moderating momentum, highlighted by softer housing activity and mixed regional survey results. Meanwhile, GDP remained strong and the delayed November PCE inflation readings were stable and broadly consistent with market expectations.
Hard Data
- ADP Weekly Employment Change - Private sector job gains slowed to +8K vs +11.25K prior, indicating softer hiring momentum.
- Pending Home Sales (Dec) – Pending sales printed - 9.3%, falling to an index level of 71.8, the lowest since July. The index was forecasted to drop -0.3%; November’s print was +3.3.
- Housing Starts & Permits - Permits fell slightly to 1.412M ( 0.2% MoM) and starts dropped to 1.246M (4.6% MoM), signaling weakening construction activity, which is generally bullish for bonds.
- Construction Spending (Oct) - Construction spending rose +0.5% MoM after a 0.6% decline in September.
- Weekly Jobless Claims (Jan 22) - Initial claims came in at 200K vs 199K the prior week and 210K expected. The 4-week moving average is 201.5k, reflecting a stable labor market.
- PCE Inflation Index (Nov) - Both Headline and Core PCE printed at 0.2% for the month, in line with expectations and the same as October. On an annual basis, both headline and Core PCE on an annual basis printed at 2.8%, a +0.1% increase versus the October levels but in line with expectations.
- GDP Q3 2025 (3rd read) – GDP was revised up to +4.4% (from 4.3%), reflecting strong consumer spending.
- GDP Price Index – Q3 (3rd read)- The GDP Price Index printed at 3.8%, as expected; indicating persistent inflation.
Soft Data (Surveys)
- Philadelphia Fed Non-Manufacturing Survey (Jan) - The general activity index improved to -4.2 versus -21.8, as revised, indicating a pickup in service sector but still in contraction territory below 0.
- Conference Board Leading Index - The Leading Index registered 0.2% vs 0.3% prior, still negative but slightly less so, signaling continued slowing momentum—bond supportive.
- Kansas City Fed Manufacturing Activity (Jan) – This region’s manufacturing survey index printed 0, below the forecast at 4, and slightly softer than the prior 1.
- Kansas City Fed Services Activity (Jan) – The services survey index printed 2, below the forecast and last month’s level at 3.
- S&P Global US Manufacturing Purchasing Managers’ Index (PMI, Jan Preliminary): Manufacturing PMI printed at 51.9, slightly better than the previous read (51.8) and marginally in expansion territory (above 50).
- University of Michigan Consumer Sentiment (final read)- UMich consumer sentiment registered 56.4, versus 54, the previous level and forecast. UMich consumer survey showed inflation expectations at 4.0% for the next year (versus 4.2% previously) and 3.3% for the 5-10 year period (versus 3.4% previously).
Fed Monetary Policy
Odds are that the Fed remains on hold at the January 28th FOMC meeting – the employment report three weeks ago was mixed with the unemployment rate moving lower to 4.4%, CPI and PCE inflation improved but still too far away from the Fed’s 2% target.
The “Fed speak” a couple weeks ago coalesced around “hold‑for‑now” (note that the Fed officials are now in a quiet period prior to the FOMC meeting on Tuesday/Wednesday). 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. A week ago 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
The 10-year Treasury yield stands at about 4.24% (as of 1/23), down from the 2025 peak of 4.79% (1/14/2025) but off the low end of the 2025 range (3.95% 10/22/2025). A 10-year yield at around 4.25% is about right for now, somewhat elevated from the recent range but reflects the possibility of reduced appetite for US Treasury securities from foreign investors' as well as the recent fundamental economic data that suggests that the US labor market, a key driver for lower yields, is stabilizing. This recent labor data includes a decline in Challenger job layoffs, and weekly jobless claims remaining subdued, with the four week moving average near 201.5k.
For yields to make a sustained move back towards 4% or lower, we need consistent evidence that inflation is trending towards the Fed’s 2% target, reduced concerns about the possible pass-through of tariffs into prices, and/or labor data that shows weaker.
Fed monetary policy expectations also anchor the outlook for 10-year yields. Current projections from Wall Street forecasters suggest the Fed will deliver one to three ¼ point rate cuts in 2026, pushing the Fed funds rate towards a 3%-3.5% terminal level. A measured Fed easing cycle should help move the 10-year yields lower, but not dramatically lower without more convincing disinflation. If the bond market believes that the Fed’s monetary policy is too accommodating, the longer end of the yield curve could move in the opposite direction driven by concern over inflation reigniting.
This Coming Week’s Economic Data
The focus will be the FOMC rate decision and Powell’s press conference in the afternoon on Wednesday (1/28). Thursday we will see producer price inflation (PPI) for December and weekly jobless claims. 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.