Bond Traders Seize on 4% Yields, Confident Fed Rate Cuts Coming

Traders betting on a 2024 bond rally are unfazed by the recent pullback, seeing it as a chance to seize on elevated yields before the Federal Reserve starts driving down interest rates.

The dynamic was on display Friday when bond prices dipped after the Labor Department reported that job growth unexpectedly accelerated last month. But the selloff was curtailed because buyers swooped in as 10-year Treasury yields neared 4.1%, the highest since mid-December.

The rebound — even in the face of data showing continued strength in the economy — highlighted the stark shift in sentiment over the past two months, with investors increasingly confident that the bond market is firmly recovering from its worst downturn in decades. Despite the recent backup, yields are still well below October’s peaks as traders wager that the Fed may start easing monetary policy as soon as March.

“Anything between 4% and 4.2% is a buy” for the 10-year, said Priya Misra, portfolio manager at JPMorgan Asset Management, noting that the yield was at the upper end of that range ahead of the last Fed meeting. “For 4.2% to break, we have to bring hikes back in or take out overall cuts.”

Treasury Yields Above 4% Are The Buying Zone

The rally that gripped the bond market during the last two months of 2023 put an end to what had been the worst losses in decades, driving Treasuries to a gain for the year and bolstering conviction that yields won’t retest the previous peaks. While investors are mindful that yields may drift higher if incoming data alters expectations about the Fed’s likely path, some big investment firms have been looking at recent drops as good times to buy.