Treasuries Post First Gain Since 2020 as Fed Pivot Gets Traction
The US Treasury market posted its first annual gain since 2020 as slowing growth and inflation bolstered views that the Federal Reserve’s campaign of interest-rate increases is likely over.
The result stands in sharp contrast to the market’s performance for most of 2023. Benchmark yields were propelled to multiyear highs in October by the prospect that monetary policy would remain tight indefinitely. Growth in the supply of Treasury debt also spurred investors to demand higher rates of return. At its worst point on Oct. 19, year-to-date losses reached 3.3%.
But then a slower pace of employment growth was sustained and inflation rates ebbed to levels last seen in 2021. Fed policymakers began to signal that additional rate increases appeared unnecessary. At the same time, the Treasury Department slowed the pace of its auction-size increases, and crude oil and gasoline prices declined.
As measured by the Bloomberg US Treasury Index, the market’s gains in December and November were among its biggest in years. Short-maturity yields, more sensitive to changes in monetary policy, declined the most, leaving yield-curve spreads steeper or less inverted.
For 2024, many US interest-rate strategists expect that short-maturity yields will continue to decline as the Fed lowers its target for the fed funds rate from 5.25%-5%, with most expecting cumulative cuts of one to two percentage points.
- The Bloomberg US Treasury Index returned 4.1%, its first full-year gain since 2020, when the Covid-19 pandemic caused a global recession; the best months for the index were November (3.5%), December (3.4%), March (2.9%) and January (2.5%); the worst were February (-2.3%) and September (-2.2%)
