US bond market rallies on Trump Treasury pick, short covering

NEW YORK – US Treasury yields declined sharply on Monday as investors expected a more moderate than feared US fiscal trajectory after hedge fund manager Scott Bessent was nominated as US Treasury secretary by President-elect Donald Trump on Friday.

Benchmark 10-year Treasury yields were down by some 15 basis points while two-year yields declined by about 10 points, leading the closely watched curve that compares yields on those two maturities to invert.

Expectations of a widening budget deficit due to tax cuts under Trump’s Republican government have pushed Treasury yields higher over the past few weeks. The choice of Bessent, however, was largely seen by investors as limiting the potentially negative impact of Trump’s policies on US fiscal health as well as putting a lid on expected increases in tariffs.

“He’s a Wall Street guy, he’s very good at what he does, he’s not an extremist to the left or right, he’s a sensible smart businessman, and I think the market likes that, and he’s anti-deficit,” said Tony Farren, managing director at Mischler Financial Group.

Benchmark 10-year yields stood at 4.269%, down from 4.41% on Friday and hitting their lowest since Nov. 6 during the day. Two-year yields, which more closely reflect monetary policy expectations, were at 4.274%, from 4.369% on Friday. Further out, 30-year yields dropped to 4.451%, their lowest since Nov. 7.

The rally was exacerbated by investors closing off short positions – or bets that yields, which move inversely to bond prices, would rise.

“Everyone is offside,” said Thomas Hayes, chairman of Great Hill Capital in New York. “Bessent was the catalyst … the market was at an extreme and Bessent was the ‘excuse’ for it turning around,” he added.

In the week ended on Nov. 19, speculators had increased their net short bets on five-year Treasury futures to the largest on record, according to data from the Commodity Futures Trading Commission on Friday. Shorts in two-year Treasury futures have also been rising over the past two months.

Contributing to Monday’s bond rally, a USD 69 billion Treasury auction of two-year notes was well received by the market. The notes were sold with a high yield of 4.274%, about two basis points below the market at the bidding deadline, a sign investors were willing to pay up to absorb the issuance.

2/10 CURVE INVERTS

The part of the Treasury yield curve that plots two-year and 10-year yields was slightly inverted, as short-term bonds yielded about 0.5 basis points more than longer ones.

The inversion, the first in over a month, was partly due to the Bessent nomination easing fiscal concerns, Capital Economics said in a note. It added, however, that it expects the curve to steepen going forward, as rate cuts will put downward pressure on short-term yields and fiscal worries will lift longer-dated yields.

For Farren at Mischler, a flattening of the curve was to be expected. “With Trump being president, the Fed is going to be less aggressive,” he said.

On Monday, traders in interest rates futures were assigning a 52.5% probability to a 25 basis point interest rate cut by the Federal Reserve in December, down from a 59% probability on Monday last week, CME Group data showed.

Bessent told the Wall Street Journal in an interview published on Sunday he will prioritize delivering on election tax cut pledges, while also focusing on cutting spending and maintaining the status of the dollar as the world’s reserve currency.

The logic behind Monday’s bond rally was “relatively straightforward” as it was based on a view that Bessent will “keep a leash on deficits and take a thoughtful approach to tariffs,” strategists at BMO Capital Markets said in a note.

“Bessent won’t prevent tariffs from being utilized or borrowing needs from increasing,” they wrote. “It’s simply the perception that both will be approached in a more methodical manner with an adherence to traditional economic policy.”

(Reporting by Davide Barbuscia; editing by Jonathan Oatis)