A broad sell-off on the U.S. stock market in pre-market trading caused a drastic decline in the yields of U.S. bonds, pushing debt instrument prices to their highest levels since the beginning of 2025.
The 10-year Treasury bonds yield fell to 4.504%, approaching the psychological barrier of 4.5%, which had previously served as support for traders investing in the debt market. Meanwhile, the yield on 2-year Treasury bonds dropped to 4.17%, reducing the 10y-2y spread to 0.335% (the difference between 10-year and 2-year bond yields had peaked at the beginning of January, surpassing 0.4%).
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Yields of U.S. 10-year bonds (white line), 2-year bonds (blue line), and the difference between 10-year and 2-year yields (red line). Source: Bloomberg Finance L.P.
We also observe a shift in the yield curve compared to early January, when the curve inverted following increased market concerns about the future direction of the Federal Reserve's policy. The lack of change in the shape of the curve suggests that the source of today's yield declines is not a shift in investor sentiment toward the Fed's policy but rather an increase in risk-off strategies amid heavy selling in the U.S. stock market.
Comparison of yield curves from January 27 (green line) and January 2 (yellow line). Source: Bloomberg Finance L.P.
Such a strong move in bonds, driven by investor concerns, may prove premature, especially ahead of the Federal Reserve's meeting on Wednesday and its decision on interest rates. The key to sustaining this movement will be the tone of the Fed's decision, as markets currently price in no change in interest rates, and a rate cut in such an environment is highly unlikely. Investors will particularly focus on the Fed's explanations regarding the first week of Trump's policies and the president's push for lower interest rates.
For now, the decline in bond yields reduces the room for further price increases in the debt market in the event of a more dovish tone from the Fed. Instead, investors should expect this movement to strengthen under such a scenario rather than a drastic continuation.
The U.S. bond futures contract approached a key resistance level at 109. At the same time, the contract's price stalled near the 50-session moving average (EMA50, light blue line on the chart). Source: xStation.
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