Return of Inflation Fears... U.S. Treasury Yield Eyes 5%

Trump Tariffs and Aftermath Under Scrutiny

10-Year Yield Jumps 0.5%P in a Month

As President-elect Donald Trump prepares to take office, U.S. Treasury yields are soaring.

On the 7th (local time) in the New York bond market, the 10-year U.S. Treasury yield closed at 4.685%, up 0.069 percentage points from the previous trading day. The 10-year yield has risen 0.5 percentage points in the past month, reaching its highest level in eight months.

The rise in Treasury yields is largely due to U.S. economic indicators sparking inflation concerns. According to the Institute for Supply Management (ISM), the December Services Purchasing Managers' Index (PMI) showed the price index at 64.4, significantly exceeding the expected 57.5.

In a 10-year Treasury auction conducted by the U.S. Treasury Department that day, the yield was 4.68%. This is a sharp increase of 0.445 percentage points from the yield (4.235%) at last month's auction, marking the highest level since August 2007.

Bloomberg News reported, "This week, corporate bond issuance is surging, and a $119 billion U.S. bond auction is underway," predicting that the 10-year Treasury yield could rise to the 5% range. Due to the rise in Treasury yields, the S&P 500 Index fell by 1.1%, and the tech-heavy Nasdaq Index dropped by 1.89%.

'Trump Tariff' Concerns Shake Bond Market... "If Realized, Rate Shock"

If Tax Cuts and Immigration Promises Pass Congress, U.S. Treasury Prices Could Plummet

The recent rise in U.S. Treasury yields is being described as "very unusual." Although the U.S. Federal Reserve (Fed) lowered the benchmark interest rate by 1 percentage point since last September, U.S. Treasury yields have risen by about 1 percentage point during the same period. Long-term bond yields are calculated as the sum of short-term bond yields and the term premium, with short-term bond yields influenced by policy rates.

Joseph Brusuelas, chief economist at RSM US, analyzed on the 7th (local time) that "about 80% of the recent rise in the 10-year Treasury yield is due to the term premium." The term premium reflects the risk associated with holding bonds. Brusuelas explained, "As the second Trump administration implements expansionary fiscal policies, investors are pricing in increased government spending, annual operating deficits, and increased volatility into bond prices."

President-elect Donald Trump pledged during the election campaign to lower the corporate tax rate from 21% to 15% and the top income tax rate from 39.6% to 37%. The bipartisan think tank Committee for a Responsible Federal Budget (CRFB) predicted that if these tax cut promises are realized, a fiscal deficit of $9.15 trillion (about 12,600 trillion won) will occur over the next decade. Issuing Treasury bonds to cover the fiscal deficit lowers Treasury prices (raises yields).

The "big and beautiful bill" reportedly being pushed by Trump's team is further heightening the sense of crisis in the bond market. The U.S. Republican Party initially planned to handle border strengthening and immigration reform separately from the tax cut bill but is now considering bundling them into a single package bill.

Torsten Slok, chief economist at Apollo Global Management, warned, "If this bill passes, a second Liz Truss situation could occur." When former UK Prime Minister Liz Truss announced a £45 billion (about 81 trillion won) tax cut plan in 2022, the market interpreted it as a signal for massive bond issuance, leading to a collapse in UK Treasury prices (rising yields). In the U.S., if the Republican Party increases fiscal spending for border strengthening while simultaneously cutting taxes, the bond market could experience a shock.

There is also an opinion that the rise in Treasury yields could dampen the U.S. stock market rally. Evercore ISI previously assessed that if the 10-year Treasury yield rises to 5%, it could threaten the bull market. ING Group predicted that the 10-year yield could rise to 5.5% by the end of the year, while global asset manager T. Rowe Price forecasted it could reach 6%. Kwon Oh-sung, a strategist at Bank of America, said, "Fears of growth (slowdown) have subsided, and concerns about rates and sticky inflation have become a bigger focus for the market."

Kim In-yeop, reporter inside@hankyung.com