The world’s biggest bond market has clawed its way back after spending chunks of 2023 underwater. Now many US debt watchers see the pathway clearing for a real revival.
The Bloomberg US Treasury Index shifted earlier this month to a positive return for the year as signs of slowing inflation and measured jobs growth unleashed a rally that sent benchmark yields tumbling from their highest in more than a decade. There have been some reversals along the way — including a mild climb in yields at the end of the holiday-shortened week — but the index is still about where it was at the start of the year and the overarching tone is constructive.
Most Wall Street strategists are predicting that the trend of lower yields will persist and set the stage for broad-based gains in 2024, with longer-term rates moving down more gradually given the barrage of debt issuance needed to fund an out-sized US deficit. Of course, many of these same market experts were forecasting a big year for bonds in 2023, which so far hasn’t materialized. But there are several supporting factors to help them make their case this time.
Inflation continues to ebb, the US labor market is gradually cooling and the once relentlessly bearish commodity trading advisers community — a group that won big over the past year betting on higher yields - is slowly exiting from bearish wagers. All this is amid growing investor sentiment that the Federal Reserve’s most aggressive hiking cycle in decades is over, with the US central bank’s flip to cutting rates expected by some as soon as the first half of 2024.
“I don’t think the Fed is going to be fast to pivot” but that will be “the direction of travel,” said Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management. “That’s because you are seeing inflation coming down as well as a deceleration of growth.” Next year “is going to be the year of bonds, with them performing well. You’ll also see a steepening of the yield curve because there is a lot of borrowing that is going to take place.”
Benchmark 10-year Treasury yields have fallen just over half a percentage point after hitting a 16-year high of 5.02% on Oct. 23, to hover at about 4.47% as of Friday afternoon in New York. Two-year yields traded at 4.95% versus a high this cycle of 5.26% reached last month.
There are several Fed speakers scheduled for the coming week, including Fed Chair Jerome Powell. Officials may signal that additional tightening remains an option after the recent drop in rates and rally in risk assets eased financial conditions somewhat — working against the central bank’s efforts to tamp down demand.
There isn’t much top-tier economic data on the docket, though traders will get a key reading on price pressures Thursday with the government’s release of personal-consumption expenditures data for October. The data — which is the Fed’s preferred inflation measure — is forecast to show a step down in the pace of price growth. Looming the following week is the monthly jobs report for November. Traders will be watching this closely, especially after October job growth slowed by more than expected and helped ignite the current rally in rates.
What Bloomberg Intelligence Says...
“Treasuries are poised for double-digit returns in 2024, given the Bloomberg Economics view of the year starting in a recession, followed by a tepid recovery. Treasury demand could overwhelm supply with expectations of easier monetary policy and declining inflation, while federal deficits will continue to be a concern.”
— Ira F. Jersey and Will Hoffman, BI strategists
Click here to read the full report
While last month’s rise in yields probably marked the peak for now, there may be more bumps ahead for the bond market, said Brian Smedley, chief investment officer at the Cynosure Group. That’s because central bankers aren’t likely to signal a pivot to easing anytime soon as the economy only slowly weakens further over coming months.
“The Fed is likely to be saying, ‘Don’t get too excited about rates cuts’ for now,” Smedley said in a phone interview. “That’s the game they will likely play for a while.”
Strategists are JPMorgan Chase & Co. align with Shah in seeing best opportunities in shorter maturities ahead in part as they expect that the Fed will continue paring back its balance sheet as part of quantitative tightening, even when it begins lowering rates in the second half of 2024. That will put upward pressure on term premium, or the extra yield investors demand to own longer-term debt instead of rolling over shorter-term securities as they mature. They are advising clients to purchase Treasuries in the two- to five-year maturity sector as the best way to profit in this environment.
“The price for the additional supply and the fiscal deficits has got to show up somewhere to entice bond buyers to come in to the table,” said Ella Hoxha, head of fixed income at Newton Investment Management. So, “we favor steepeners.”
To get a real boost, long-term Treasuries need the US economy to fall into a deep recession, Hoxha added.
What to Watch
- Economic data:
- Nov. 27: Bloomberg US Economic Survey; New Home Sales; Dallas Fed Manufacturing
- Nov 28: FHFA house price index; S&P CoreLogic home prices; Conference Board consumer confidence; Richmond Fed manufacturing index and business conditions; Dallas Fed services activity
- Nov. 29: MBA mortgage applications; advance goods trade balance; wholesale inventories; retail inventories; GDP; personal consumption; GDP price; core PCE price; Fed Beige book
- Nov. 30; Initial jobless claims; personal income/spending; PCE deflator; MNI Chicago PMI; Pending home sales
- Dec. 1: S&P global US manufacturing PMI; construction spending; ISM manufacturing; Ward total vehicle sales
- Fed Calendar:
- Nov. 28: Chicago Fed President Austan Goolsbee; Fed Governor Chris Waller
- Nov. 29: Cleveland Fed President Loretta Mester;
- Dec. 1: Fed Chair Powell; Fed Governor Lisa Cook; Goolsbee
- Auction calendar:
- Nov. 27: 13-, 26-week bills; 2- and 5-year notes
- Nov. 28: 52-week bills; 42-day cash management bills; 7-year notes
- Nov. 29: 17-week bills; 4-, 8-week bills
