The U.S. Treasury yields have witnessed a significant shift as the two-year bonds declined, with yields surging to 4.34% on Tuesday. This rise in yields is the most since July 2024, according to Bloomberg. Simultaneously, the ten-year yields also climbed to 4.40%.

Expert Divisions on Yield Increases

Few experts remain divided regarding the rise in yields. Former Pimco CEO Mohamed El-Erian stated that there are two "major explanations" that the market may be pricing. He emphasized that these two possible consequences are not mutually exclusive.On one hand, the market might anticipate tax cuts from the new policies proposed by President-elect Donald Trump. This could lead to higher bond issuances to secure funding for the future, resulting in lower bond prices and higher yields.On the other hand, the "explanation" points towards higher tariffs during Trump's administration. Higher tariffs will lead to reduced demand for imported goods and increase domestic prices above the free trade price, gradually fueling inflation.

Analysts' Explanations for US Bond Yield Move Up

The two major explanations put forward by analysts for today's move up in US bond yields are not mutually exclusive. There is talk of actual and possible appointments to the President-Elect's Administration who favor the use of tariffs as a national security tool and not just an economic measure. This sentiment is reflected in the market and has an impact on bond yields.Apart from these scenarios affecting the longer end of the yield curve, Federal Reserve rate cuts may cause yields to swell in the short term. Mohamed El-Erian shared a chart showing how the central bank has expected the economy to slow down but it still hasn't happened. Minneapolis Fed President Neel Kashkari, while speaking at the Yahoo Finance Invest conference, stated that the U.S. economy has remained remarkably strong as the central bank made progress in beating back inflation, but the Fed is still "not all the way home."Adding to what could cause policymakers to pause the 25 basis points cut in December, Kashkari said, "If we saw inflation surprises to the upside between now and then, that might give us pause." "It'd be hard to imagine the labor market really heats up between now and December. There's just not that much time."

Views on Fed's Room to Cut Rates

However, a few analysts believe that the Fed has enough room to cut interest rates further without worrying about a surge in inflation. Ryan Detrick, chief market strategist at Carson Group, says that strong productivity will help keep inflation in check. "As long as productivity remains strong (like we think it should), the path is there for the Fed to continue to cut interest rates and not worry about inflation soaring back."In the longer term, the rise in bond yields is likely to be a function of both the administration's policies and the Federal Reserve's future roadmap.