The 10-year US Treasury yield rose quite significantly in December, despite the FOMC’s pledge to buy more long-term government bonds. The rise was prompted by at least three factors. First, slow progress on agreeing a deal (now struck) on fiscal policy whetted investors’ appetite for risk as it suggested the full effects of the fiscal cliff would be avoided. Second, the likelihood that a more meaningful deal would not be done raised concerns that other rating agencies might join S&P in stripping the US of its AAA credit rating. And third, the lack of an agreement on the debt ceiling may have led some to worry about the remote possibility of a default. Still, the prospect of continued ultra-loose monetary policy provided ongoing support to bonds.
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