Benchmark yields rose to their highest levels in October on the prospect of continued monetary policy tightening
Slowing growth and rising inflation have reinforced views that the Federal Reserve may be done raising interest rates
The US Treasury market posted its first annual gain since 2020, as slowing growth and rising inflation reinforced the view that the Federal Reserve may be done raising interest rates.
This result is in stark contrast to the market's performance throughout most of 2023. Benchmark yields rose to multi-year highs in October, on the back of the possibility that monetary policy will remain tight indefinitely. The growth in the supply of Treasury bonds also spurred investors to demand higher yields. Treasury bonds reached their worst levels on October 19, with their losses since the beginning of the year amounting to 3.3%.
But after that, the slower pace of employment growth continued, and inflation fell to levels last seen in 2021. Policymakers at the US Federal Reserve began to signal that raising interest rates further seemed unnecessary. At the same time, the US Treasury slowed the pace of increases in auction volumes, and crude oil and gasoline prices fell.
The US Treasury market recorded its largest gains in years during the months of December and November, according to the Bloomberg US Treasury Index. Short-term bond yields, which are more sensitive to monetary policy changes, fell further, making yield curve spreads steeper or less reflective.
US Treasury bonds rise as bets on interest rate cuts increase
Regarding 2024, many US interest rate strategists expect short-term bond yields to continue to decline once the Fed lowers its target for the federal funds rate from 5.25% to 5%, with most expecting cumulative cuts ranging from one or two points. Two cents.
The Bloomberg US Treasury Index rose 4.1%, its first full annual gain since 2020, when the 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%), while the worst months were February (-2.3%) and September (-2.2%).
2023 changes to standard returns:
For two years, -18 basis points.
For five years, -16 basis points.
For ten years, +0.4 basis points.
For thirty years, +6.5 basis points.
Yields saw a zig-zag path during the first part of the year after the regional banking crisis in March raised doubts about the economic outlook. Yields began to rise steadily in May as expectations grew that the Federal Reserve would raise interest rates again, along with strong economic data, stabilizing regional bank stocks and an agreement to suspend the US debt ceiling.
10-year bond yields reached 3.25% in April, their lowest level this year, while they peaked at approximately 5.02% in October.
The Fed last raised interest rates in July, the 11th increase since March 2022.
Three commandments to prevent a Treasury bond market collapse
Oil and gasoline prices were a factor, with WTI futures starting the year at around $80, rising to a peak in late September at near $95, and eventually falling to around $72.
Inflation expectations for Treasury inflation-protected bond yields also fell, with the five-year breakeven rate at its lowest levels since early 2021.
Actual inflation continued to slow, with the CPI rising 3.1% year-on-year in November, while core inflation rose 4%.
New expectations
Expectations for changes in US interest rates shifted significantly after the last meeting of the Federal Reserve during 2023, which was held on December 12 and 13, and included new quarterly expectations for the federal funds rate at an average of 4.625% for the end of 2024, compared to 5.125% previously.
Other major sovereign bond markets followed a similar path, with 10-year bond yields in the UK, Germany and Japan falling from their highest levels since the start of 2023, which they reached during the second half of the year. It is also expected that major central banks around the world will focus on lowering interest rates in 2024.
Repeatedly large daily fluctuations in returns remained a feature of the general landscape, and volatility and liquidity indicators reached historically high levels.
Some of the biggest daily moves came in:
March 10 - Silicon Valley Bank collapses.
March 13 - A sharp rise in global bond trading as expectations of raising interest rates faded after the US authorities took exceptional measures to boost confidence in the financial system.
March 15 - Plans to acquire “Credit Suisse” after a decrease in deposits.
March 27 - Weak two-year bond auction, supply of corporate bonds.
May 1 - Manufacturing PMI, supply of corporate bonds.
May 2 - Weak job vacancy data, stock market sell-off.
June 29 - Strong GDP data.
October 12 - Weak 30-year bond auction.
November 9 - Weak 30-year bond auction.
November 14 - Good CPI data.
December 13 - FOMC interest rate decision.
The US Treasury resumed increasing auction volumes in August, announcing a quarterly plan that was more ambitious than most Wall Street traders expected. By contrast, the next plan announced in November includes smaller increases for longer-dated debt offerings than most traders expected.
The dollar's largest decline in a year amid a bet on the end of interest hikes
The first trading week of 2024 brings a raft of US economic data and minutes from last month's Federal Reserve meeting. The data includes the December employment report, which will be released on January 5, along with other key labor market indicators, and measures of manufacturing and service sector activity. Treasuries supply also includes bond auctions only.
What to watch for:
Economic calendar:
January 2: S&P Global US Manufacturing Purchasing Managers’ Index, Construction Spending.
January 3: Mortgage Bankers Association mortgage applications, manufacturing PMI, vacancy and labor turnover data.
January 4: A measure of private sector employment, job cuts, jobless claims, and the S&P Global US Services PMI.
January 5: Jobs, Factory Orders Report; PMI Services.
Fed calendar:
January 3: Minutes of the December 12-13 FOMC meeting, Richmond Fed President Tom Barkin.
January 5: Barkin.
Auctions calendar
:
January 2: 13- and 26-week bonds and 42-day cash management bonds.
January 3: 17-week bonds.
January 4: 4- and 8-week bonds