The selloff in US debt appears close to being over as the Federal Reserve nears winding up its most aggressive rate hikes in a generation.
At the same time, monetary policy is poised to cede its central role in moving Treasuries to another force: The scale of the federal government’s deficit. Those are conclusions drawn from a Bloomberg Markets Live Pulse survey conducted Wednesday after the Fed’s latest meeting.
They reinforced the optimism that drove the bond market to one of its biggest one-day rallies of the year. The 10-year Treasury yield tumbled about 20 basis points to 4.73%, the biggest drop since March.
“The risk-reward in Treasuries is decent going into 2024 — especially if economic activity slows down and rate cuts materialize,” said Spencer Hakimian, the founder of Tolou Capital Management.
Almost half of the 160 respondents to the Pulse survey said that they don’t expect the Fed to raise its benchmark rate further, predicting the next move in the cycle will be an easing of policy as the economy slows.
The views underscore the growing optimism that Treasuries are coming to the end of an unprecedented three-year downturn on the back of the central bank’s steepest rate hikes since the early 1980s.
Those sharp increases caused bond prices to tumble, with the 10-year yield surging by more than four full percentage points from its pandemic low. The current levels are widely seen as providing interest payments large enough to ease the price hit if yields again start pushing higher.
“There’s a tremendous amount of value in the bond market today,” Greg Peters, co-chief investment officer of PGIM Fixed Income, said on Bloomberg Television. But he warned that given the shape of the yield curve, with long-term rates still below those with shorter maturities, there wasn’t a “need to rush in” to buy longer-dated bonds.
The Fed didn’t rule out the possibility that it may need to raise rates again even as it noted that tighter policy is likely to exert a drag on hiring and economic growth. Chair Jerome Powell in his press conference following the meeting said officials had made no decision about what they will do in December, adding that even if they pause again it won’t necessarily mean the tightening cycle is over.
“The Fed has a small possibility” of one more hike, possibly in December, and incoming data will decide the matter from here, said Sinead Colton Grant, head of BNY Mellon Investor Solutions.
That means the scale of any future bond selloffs are likely to be far more muted than the ones that have raced through the market since the Fed’s hikes began in March 2022.
Forty-nine percent of those who responded to the Pulse survey said they still think 10-year yields will rise up to near peaks but not higher than 5.5%, roughly three-quarters of a percentage point above Wednesday’s levels. Only 13% said they will peak above 5.5%.
During its quarterly bond sales announcement, the Treasury announced that it was slowing the pace of the increases in sales of 10-year and 30-year securities, a move that was welcomed by investors.
The sales announcement “came in slightly smaller than expected, but that is still an enormous amount of supply for the market to have to absorb,” said Michael de Pass, the global head of rates trading at Citadel Securities.
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