A look at the day ahead in U.S. and global markets from Mike

Dolan

Dragging up government borrowing costs across the world, the new

year spike in long-term U.S. Treasury yields is flashing red as

a long-absent risk premium in debt markets re-builds alarmingly

amid fiscal policy and interest rate fears.

The New York Federal Reserve's estimate of the 10-year 'term

premium' - seen as the compensation investors seek for holding

long-term Treasuries to maturity instead of rolling over

short-term debt holdings - topped 50 basis points this week for

the first time since 2014.

Partly reflecting uncertainty about long-term inflation

expectations and debt supply and an incoming U.S. administration

intent on tax cuts, immigration curbs and tariff rises, the

30-year Treasury yield hit its highest since 2023 on

Tuesday and 10-year yields hit their highest in almost 9 months.

At almost 64bps, the 2-to-30 year yield curve gap

on Wednesday reached its widest since the Fed started raising

interest rates in March 2022. With this week's latest heavy

Treasury debt sales frontloaded due to Thursday's market holiday

and high seasonal corporate bond issuance in the background, $22

billion of 30-year 'long bonds' go under the hammer later today.

The more immediate cause of bond market anxiety - which

sideswiped stock markets again on Tuesday - comes

from the week's persistently 'hot' economic releases - adding

concern about future Fed rate cuts as President-elect Donald

Trump's economic policies are parsed.

ISM's December survey of U.S. services sector businesses

showed activity accelerated in December, while a measure of

prices paid for inputs surged to near a two-year high.

And in a big week for U.S. labor market updates, data showed

job openings in November grew to 8.098 million, exceeding

forecasts for a 7.7 million rise, and higher than October's

numbers of 7.839 million.

ADP's private sector job reading for last month and the

latest weekly jobless claims numbers are due later on Wednesday

ahead of Friday's national employment report. Markets and

government offices are closed Thursday for former President

Jimmy Carter's funeral.

'HIGHLY UNUSUAL'

The brisk growth and inflation readouts are pushing back

expectations for Fed easing, with futures not seeing another

quarter point cut until June and doubting any more this year.

Only 38bps of Fed easing is now priced for the whole of 2025.

Minutes from the Fed's latest policy meeting, where

policymakers indicated just 50bps of additional rate cuts for

this year, are due for release later on Wednesday.

But even given that recalibration, the movement of bond

yields - where 10-year yields have risen 100bps since September

as the Fed has cut 100bps over the same period - is "highly

unusual", according to Apollo Chief Economist Torsten Slok.

"The market is telling us something, and it is very

important for investors to have a view on why long rates are

going up when the Fed is cutting," Slok told clients, positing

fiscal worries, less bond demand from abroad or unjustified Fed

cuts as possible reasons.

Rising Treasury yields, meantime, have lifted the dollar

anew and also boosted long-term borrowing costs in other

G7 economies in the slipstream. Most notably on Tuesday, 30-year

British 'gilt' yields hit their highest since 1998.

While 10 and 30-year Treasury yields ticked back a touch

early Wednesday, they have retained the bulk of the week's sharp

rise.

Adding to the bond market tension, oil prices rose again on

Wednesday as supplies from Russia and OPEC members tightened

while U.S. crude oil stocks fell last week, market sources said,

citing American Petroleum Institute figures.

At 5%, the year-on-year rise in U.S. crude is at its

highest since July.

U.S. stock futures recovered a fraction of Tuesday's

heavy tech-led losses early today, although Japanese and

Chinese bourses fell again alongside a 0.8% drop in

emerging markets indexes.

Chinese stock losses were narrowed in late trading there as

markets digested Beijing's latest measures to expand the scope

of consumer trade-ins. But leading the decline onshore, shares

of semiconductor firms fell 0.7% as the U.S.

Defense Department expanded the list of firms allegedly aiding

Beijing's military.

Back stateside, uncertainties around the policies of the

Trump administration were heightened by the President-elect's

refusal to rule out using military or economic action to pursue

acquisition of the Panama Canal and Greenland, part of a broader

expansionist agenda he has promoted since winning election.

Trump also criticized American spending on Canadian goods and

military support for Canada, saying the U.S. derives no benefits

from doing so, and called the border between the two countries

an "artificially drawn line."

With a domestic political hiatus following Canadian Prime

Minister Justin Trudeau's decision to stand down as Liberal

Party leader, the Canadian dollar remained calm.

In Europe, stocks seemed to buck the wider global nerves and

hit three-week highs. European shares advanced on

Wednesday, led by heavyweight financial stocks and as defence

firms got a boost after Trump called for higher spending from

NATO allies.

Trump said he believes European members of NATO should spend

5% of their GDP on the alliance's defense.

Key developments that should provide more direction to U.S.

markets later on Wednesday:

* US December ADP private sector payrolls, weekly jobless

claims, November consumer credit

* Federal Reserve's Federal Open Market Committee releases

minutes of latest meeting

* Federal Reserve Board Governor Christopher Waller speaks

* US Treasury sells $22 billion of 30-year bonds

(By Mike Dolan, editing by XXXX

[email protected])