TREASURIES-US 10-year yield hits 14-month peak amid Trump policy uncertainty, resilient economy

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US two-year yield hits highest since July 2024

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US 2/10 yield curve steepens, hits widest gap since May 2022

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US rate futures price in just 27 bps of cuts in 2025

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Market now looks to US inflation, retail sales data

(Adds comment, graphic; updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Jan 13 (Reuters) - U.S. Treasury 10-year yields surged to 14-month highs on Monday in choppy trading before pulling back, boosted by a combination of a strong labor market and persistent inflation that should compel the Federal Reserve to pause its easing cycle this year.

Uncertainty surrounding the policies of the incoming Trump administration on tariffs, tax cuts, and immigration also weighed on Treasury prices, which move inversely to yields.

Investors also covered short positions earlier in the session that briefly pushed prices higher and yields slightly lower.

Volume was thinner than usual with a public holiday in Japan on Monday, and therefore moves could have been exaggerated a little bit. Japan is the largest non-U.S. holder of Treasuries.

"Everybody is re-assessing their views on the strength of the U.S. economy," said Jim Barnes, director, fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania. "With that, the market has been taking rate cuts off the table for this year, questioning to some degree where policy rates need to be in order to slow down economic growth."

In afternoon trading, the benchmark 10-year yield rose to 4.799%, the highest since November 2023, and was last up 2.2 basis points (bps) at 4.796%.

On the short-end of the curve, the two-year yield, which is sensitive to U.S. rate outlook expectations, was little changed at 4.398%. Earlier in the session, it climbed to 4.426%, the strongest level since July.

Aside from economic data, markets are also focused on President-elect Donald Trump's inauguration on Jan. 20. Market participants said investors will continue to sell Treasuries, further lifting their yields, until there's clarity on his policies.

"We'll find out more in a week or 10 days or so, as we see executive orders come out of the White House," said Stan Shipley, managing director and fixed income strategist at Evercore ISI in New York.

"But right now, growth is strong, it looks like inflation may be turning up a little bit here, and you tack on uncertainty to that, and that's not a good sign for Treasuries," he added.

STEEPER YIELD CURVE

The U.S. yield curve, meanwhile, steepened on Monday, with the spread between two- and 10-year yields touching 47.7 bps , the widest gap since May 2022. It was last at 39.6 bps.

This means that yields on the 10-year are higher than those on the two-year, which is the typical normal slope of the curve and suggests that investors are compensated with a higher yield for taking risk over a longer period of time.

The yield curve was at 37.8 bps last Friday, following a jobs report that came way higher than expectations. Data showed that the U.S. economy added 256,000 jobs in December, compared with economists' forecasts for an increase of 160,000.

The 10-year yield's term premium, the extra compensation investors demand for holding the longer-term note versus rolling their T-bills exposure, has also increased this month to 70 bps, up from 44 bps in early December, according to the latest Fed data.

"There is more uncertainty today as to what the future could hold," Bryn Mawr's Barnes said, referring to what the term premium is telling the market. "People want to be compensated for that unknown in terms of additional yield."

In U.S. rate futures, the market on Monday has priced in just 27-bps of easing this year, or one rate cut, most likely either in September or October, according to LSEG estimates. The rate futures market has been so choppy as well on Monday that it has indicated one rate cut to no cuts in 2025.

That's a far cry from the Fed's rate forecasts, or dot plot, for 2025, in which two rate reductions have been factored in by the U.S. central bank.

In other maturities, U.S. 30-year yields edged up 1.3 bps to 4.977%.

Investors are now looking to this week's U.S. inflation and retail sales data for clues as to whether the economy will continue to show resilient growth. Goldman Sachs (GS) is expecting the headline consumer price index to have risen 0.4% in December and 2.9% for 2024, reflecting higher food and energy prices.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Franklin Paul and Andrea Ricci)