A prospect that might have seemed unthinkable just a couple short weeks ago is coming into view for bond traders: The potential for US Treasuries to post an annual gain for the first time since 2020.
It’s well short of turning into ‘The Year of the Bond’ that many money managers expected entering 2023. But with this week’s remarkable about-face in the world’s biggest bond market, traders now have a sliver of hope that they can avoid an unprecedented three straight years of losses in Treasuries.
US government debt is coming off a weekly rally reminiscent of the market chaos of March 2020. Ten-year yields, a benchmark for global borrowing, fell about 25 basis points amid growing confidence that the Federal Reserve is done hiking interest rates, with the latest spark coming Friday on signs US job growth is cooling.
“The economic trajectory is lower,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “We’ve been looking for rates to correct lower.”
Faranello says he’s targeting a decline to 4.35% on the 10-year, from 4.57% now. It’s not even two weeks since the rate eclipsed 5% for the first time since 2007.
Even a flat year might be a welcome respite for bond investors, after Treasuries lost a record 12.5% in 2022, following a 2.3% hit the year before. A strategy of merely holding Treasury bills has earned about 4.2% this year.
The Bloomberg US Treasury index is still down 1.5% for this year through Thursday. But for bond bulls, that’s a move in the right direction after the gauge was down 3.3% for 2023 as of Oct. 19. Holders of 10-year notes would break even for this year if the yield finishes December at about 4.4%, according to data compiled by Bloomberg.
The outlook for bonds also brightened this week after the Treasury announced that it would lift debt issuance in the November-to-January period by less than many on Wall Street expected.
‘Fed Is Done’
Entering this year, the thinking among bond bulls was that the economy would soon wilt in the face of the Fed’s rate increases, forcing the central bank to pivot to easing. That has hardly panned out, with growth proving resilient and inflation remaining stubbornly elevated.
But traders are growing confident that the tightening campaign is over, and they’re betting on cuts by mid-2024.
“The Fed is done,” Rick Rieder, BlackRock Inc.’s chief investment officer for global fixed income, said on Bloomberg Television on Friday. “That’s it. Inflation is coming down. Payroll, labor, has finally started to come off a bit. It’s a big deal.”
Even with the slide in rates this week, “these yield levels, particularly the front to the belly of the yield curve” provide solid fixed payments, Rieder said.
What Bloomberg Intelligence Says...
"Traders are stampeding into the world’s largest Treasury ETF, the iShares 20+ Year Treasury Bond fund, as they rediscover long-forgotten bond math," Brian Meehan, market analyst.
The global backdrop is also supporting the bond bulls. Recession looms for the euro area, and China’s housing market is struggling.
The caveat is that Treasuries have been whipsawed before in 2023, seeing yields swoon and then reverse course, and there’s a camp that doubts the Fed will lower rates as soon as traders expect. Derivative traders have proven wrong-footed time and again over the last few years in pricing in that the Fed would pivot and cut.
“It’s not as if the Fed’s going to cut rates anytime soon,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree. “What we’ve been doing is shortening our underweight to duration,” but he says there are limits to how much the Treasury market can rally further, given the extent of this week’s move.
What to Watch
- Economic data calendar
- Nov. 7: Trade balance; consumer credit
- Nov. 8: MBA mortgage applications; wholesale trade sales/inventories
- Nov. 9: Initial jobless claims
- Nov. 10: University of Michigan sentiment; monthly federal budget statement
- Federal Reserve calendar
- Nov. 6: Governor Lisa Cook
- Nov. 7: Vice Chair for Supervision Michael Barr; Kansas City Fed President Jeffrey Schmid; Governor Christopher Waller; New York Fed President John Williams; Dallas Fed President Lorie Logan
- Nov. 8: Cook; Chair Jerome Powell; Barr; Fed Vice Chair Philip Jefferson
- Nov. 9: Atlanta Fed President Raphael Bostic; Richmond Fed President Tom Barkin; St. Louis Fed Interim President Kathleen Paese; Powell
- Nov. 10: Logan; Bostic
- Auction calendar:
- Nov. 6: 13- and 26-week bills
- Nov. 7: 42-day CMB; 3-year notes
- Nov. 8: 17-week bills; 10-year notes
- Nov. 9: 4- and 8-week bills; 30-year bonds
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Read more articles by Liz Capo McCormick, Michael Mackenzie, Ye Xie
