The benchmark US 10-year Treasury yield has fallen back below 5% after a bond rally that followed the midterm elections, easing one of the market's biggest worries of the past month. The yield closed at 4.84% on Thursday 5 November, down six basis points on the day, and was recorded at 4.86% in the latest daily observation on 6 November.

The move reverses a sharp sell-off in October, when the 10-year yield climbed above 5% and touched a 52-week high of 5.31% on 5 October. Yields had been pushed higher by heavy government borrowing, inflation worries and a surge in the term premium — the extra return investors demand for lending for a decade rather than rolling short-term bills.

What drove the rally

Two forces pulled yields lower. First, the midterm elections delivered Democratic control of both chambers of Congress, which investors read as a brake on further fiscal expansion. Second, the US Treasury Department changed its guidance on future debt issuance, raising hopes of less long-dated supply. A sharp sell-off in technology shares added to the flight to safety, sending money into government bonds.

OCBC Group Research, in a note dated 5 November, said the rally had gone further than it expected and warned that the optimism already priced in could limit further gains. Its head of FX and rates strategy, Frances Cheung, said the bank expects the 10-year yield to trade in a range of 4.85% to 5.00% in the near term as investors reassess the outlook for inflation, growth and Federal Reserve policy.

Inflation expectations stay contained

OCBC noted that the 10-year breakeven inflation rate stood at about 2.25%, near the lower end of its recent range, suggesting market inflation expectations remain relatively contained. The 10-year real yield, which strips out inflation, remained above 2.6%, which the bank described as elevated.

Shorter-dated yields also fell. The two-year Treasury yield stood at about 4.57%, broadly in line with market expectations for further Federal Reserve rate rises totalling 58 basis points. The 30-year yield was largely unchanged at 5.31% as of 5 November, even as the 10-year slipped below the 5% mark for a second straight week.

What to watch next

Traders now turn to the economic data. The October US consumer price index is due on Tuesday, followed by the producer price index on Friday, and both will shape expectations for the Federal Reserve's next move. The Fed's next decision is due on 9 December.

The yield matters well beyond the bond market. Every move in the 10-year feeds into 30-year fixed mortgage rates and corporate borrowing costs, tightening or loosening financial conditions for households and businesses without the Fed changing its policy rate at all. A sustained move below 5% would ease some of that pressure — but with the yield sitting close to the top of OCBC's expected range, the market is not yet convinced the October spike is over.