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NEW YORK, Dec 28 – The benchmark US 10-year Treasury yield rebounded after a brief dip on Thursday, as weak economic data weighed on investors’ outlook for interest rate cuts and a mild recession in the coming year.

Most traders have penciled in at least three rate cuts from the Federal Reserve in 2024, after the central bank signaled it had fewer concerns about inflation at its December meeting.

Yield movements on Wednesday appeared to reflect that view. The 10-year briefly touched 3.820%, its lowest since July 19, but has since climbed back up to 3.833%.

The two-year yield on Wednesday hit its lowest point since May 17 at 4.243%. It was up 2.6 basis points at 4.268%.

Meanwhile, the yield on the 30-year Treasury bond was up 3.2 bps to 3.977%.

The upward movement in yields on Thursday comes after the latest unemployment data, which showed initial jobless claims rose by 12,000 to 218,000 in the week leading up to Christmas.

However, the four-week moving average of initial jobless claims was 212,000, its lowest since late October and a sign of a resilient labor market.

“I do think that as far as the Treasury market has rallied, it could make sense to see some short-term reversal or some modest reversal,” said Michael Lorizio, managing director and senior fixed income trader at Manulife Investment Management.

“Treasuries could push towards the upper end in yields, if data supports that.

Yields briefly dipped following the release of pending home sales figures for November, which held at their lowest levels since 2001 despite falling mortgage rates.

Lorizio and other market participants have noted that it is unlikely the Fed will reverse its rate-cutting tone for next year.

“I do think there’s been just a kind of a gradual shift or change in the Fed’s view now that they’re no longer concerned about inflation getting out of control or really any part of the market overheating,” Lorizio said.

The rates market has priced in high odds the Fed will begin cutting rates in March. At the same time, however, a bear flattening yield curve has pointed to expectations of a mild recession in 2024.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -44.1 basis points.

The US Treasury Department on Thursday auctioned USD 40 billion in seven-year notes, receiving nearly three times that amount in demand. The seven-year’s yield rose to 3.882% following the results. It follows strong demand earlier in the week for auctions of two-year and five-year notes.

	Price	Current Yield %	Net Change (bps)
Three-month bills	5.2375	5.3954	-0.004
Six-month bills	5.055	5.2733	0.002
Two-year note	99-247/256	4.2685	0.026
Three-year note	101	4.013	0.025
Five-year note	99-168/256	3.8262	0.038
Seven-year note	103-32/256	3.8558	0.046
10-year note	105-112/256	3.8331	0.044
30-year bond	113-92/256	3.9812	0.036

(Reporting by Matt Tracy; Editing by Chris Reese)

 

LONDON, Dec 28 – A huge two-month rally in bond prices, powered by expectations that central banks will soon be cutting interest rates, has rescued fixed income markets from an almost unheard-of third straight year of declines.

The US 10-year Treasury yield, the benchmark for borrowing costs globally, has dropped 50 basis points (bps) in December after falling 53 bps in November. Its two-month fall is the biggest since 2008, when the Federal Reserve was slashing rates during the global financial crisis.

ICE BofA’s global broad bond market index, which includes government and corporate debt, has rallied roughly 7% over the last two months — its strongest eight-week period on record, according to LSEG data which goes back to 1997.

The sharp drop in yields, which move inversely to prices, has eased pressure on companies and households as well as housing markets and governments that in October faced the steepest borrowing costs in more than a decade.

It has also been a balm for highly indebted countries such as Italy, where bond yields are poised for their biggest monthly fall since 2013.

HAWKS TURN DOVISH

Central bankers abruptly changed their tone on inflation in December, fueling investors’ rate-cut bets. That followed a blockbuster November, when data showed US and European inflation falling much faster than expected.

“We were surprised by the strength of this rally,” said Oliver Eichmann, head of European fixed income at asset manager DWS.

The Fed’s Christopher Waller and the European Central Bank’s Isabel Schnabel, both previously renowned monetary policy hawks, softened their language in December and acknowledged – in Schnabel’s words – a “remarkable” fall in inflation.

The Fed triggered fresh market euphoria when it used its December meeting to say that rate hikes were over. Fed Chair Jerome Powell notably declined to push back against market bets on deep cuts next year, although the Fed’s “dot plot” envisaged three 25 bp cuts in 2024, compared to the more than 150 bps priced in by markets.

“That was a surprise,” said Jamie Niven, bond portfolio manager at asset manager Candriam. “And it does leave you with the question, what are they seeing that maybe the market isn’t?”

The riskier parts of the bond market, increasingly attractive as investors bet on rate cuts next year, have rallied the most.

Italy’s benchmark 10-year bond yield IT10YT=RR is on track to fall more than 75 bps in December, its biggest monthly drop since the eurozone debt crisis in 2013.

Meanwhile, the spread of junk bond yields over benchmark risk-free rates in the United States and Europe has fallen to its lowest level since the second quarter of 2022.

The two-month jump in bond prices has saved the market from the ignominy of a third year in the red, something not seen in 40 years or more, after two down years driven by inflation and rate hikes.

Bond indexes were in negative territory in October as US growth and inflation kept surprising economists, bolstering the case for higher rates for longer.

The ICE BofA broad bond market index is now heading for an annual gain of around 5%.

Not all investors are convinced their luck will hold.

“It’s gone too far,” said DWS’s Eichmann. He expects more “push-back” from central bankers in the new year and fewer rate cuts than priced in by markets.

(Reporting by Harry Robertson; editing by Dhara Ranasinghe and Christina Fincher)

 

NEW YORK, Dec 27 – The benchmark US 10-year Treasury’s yield on Wednesday hit its lowest point since mid-July, as investors expect a mild recession and Federal Reserve interest rate cuts in the New Year.

The yield on 10-year Treasury notes was down 9 basis points at 3.796%. It briefly touched 3.820% earlier in the day, its lowest since July 19.

Meanwhile, the two-year US Treasury yield hit its lowest point since May 17 at 4.243%. The two-year’s yield typically moves in step with interest rate expectations

The 30-year Treasury bond’s yield, meanwhile, was down 8.2 basis points at 3.961%.

The decline in yields to cap 2023 comes as investors anticipate a mild economic recession in the US heading into 2024. Treasuries’ yields rise as their prices fall.

“Movement within the rates market during this transition will be choppy,” said Sean Simko, managing director and head of fixed income portfolio management at SEI Investments.

“Global risks of a slowdown in growth are likely to materialize as central banks have steadily increased policy rates to current levels.”

Most traders have penciled in at least three rate cuts from the Fed in 2024. The central bank signaled as much at its December meeting, pointing to gradually easing inflation.

Markets expect rates to remain unchanged at the central bank’s next meeting in January, but have priced in high odds that it will begin cutting in March.

But many traders are typically away from their desks in the last week of the year, during which yield movements should be taken with a grain of salt, Simko said.

“Any movement within the rates market may not be viewed as a true indication of what may come in 2024,” he said.

But much of the timing and extent of rate cuts will depend on economic data, including the strength of labor markets, according to Gennadiy Goldberg, head of US rates strategy at TD Securities.

“If you see the data hold up better than anticipated – if for example, the next payroll number and next inflation print come in a little bit higher – you could still see room for a reshuffling of expectations,” he said.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was last at -44.3 basis points.

“As much as the Fed is trying to signal that they want to engineer a soft landing, we’ll see if the data cooperates,” Goldberg said.

The next significant economic data comes on Thursday, including the latest initial jobless claims.

The US Treasury Department on Wednesday auctioned USD 58 billion in five-year notes, seeing nearly three times that amount in demand. The five-year’s yield was last down 7.3 bps at 3.802%.

December 27 Wednesday 1:41 PM New York / 1841 GMT

	Price	Current Yield %	Net Change (bps)
Three-month bills	5.24	5.3988	0.026
Six-month bills	5.0575	5.2767	-0.002
Two-year note	100-3/256	4.2437	-0.045
Three-year note	101-16/256	3.9909	-0.059
Five-year note	102-140/256	3.8023	-0.073
Seven-year note	103-84/256	3.8229	-0.082
10-year note	105-176/256	3.8037	-0.082
30-year bond	113-172/256	3.9649	-0.078

 

(Reporting by Matt Tracy; Editing by Kirsten Donovan and Barbara Lewis)

 

NEW YORK, Dec 27 – As bonds emerge from a historic selloff, some investors expect better times in the US fixed income market next year – as long as the Federal Reserve’s rate cuts play out as anticipated.

A fourth-quarter rally saved bonds from an unprecedented third straight annual loss in 2023, following the worst-ever decline a year earlier. The late-year surge came after Treasuries hit their lowest level since 2007 in October.

Fueling those gains were expectations that the Fed is likely finished with rate increases and will cut borrowing costs next year – a view that gained traction when policymakers unexpectedly penciled in 75 basis points of easing in their December economic projections amid signs that inflation continued to cool.

Falling rates are expected to guide Treasury yields lower and push up bond prices – an outcome that a broad swathe of investors are anticipating. The latest fund manager survey from BofA Global Research showed investors are holding their biggest overweight position in bonds since 2009.

Still, few believe the path to lower yields will be a smooth one. Some worry the over 100 basis point drop in Treasury yields since October already reflects expectations for rate cuts, leaving markets vulnerable to snap backs if the Fed doesn’t cut soon enough or fast enough.

The market has priced some 150 basis points in cuts next year, twice what policymakers have penciled in, futures tied to the Fed’s main policy rate show. Benchmark 10-year Treasury yields stood at 3.88% last week, their lowest level since July.

Many are also watchful for the return of the fiscal worries that helped drive yields to their 2023 peaks but ebbed in the later part of the year.

“As long as the Fed doesn’t totally have this wrong, we should expect to see some rate cuts next year,” said Brandon Swensen, a senior portfolio manager on the BlueBay Fixed Income team at RBC Global Asset Management. However, “it could be a bumpy path.”

‘BONDS ARE BACK’

US bond year-to-date returns, which include interest payments and price changes, totaled 4.8% as of last week, compared with negative 13% last year, according to the Bloomberg US Aggregate Bond Index.

“Bonds are back,” Vanguard said in an outlook report published earlier this month.

The world’s second-largest asset manager expects US bonds to return 4.8%-5.8% over the next decade, compared with the 1.5%–2.5% it expected before the rate-hiking cycle began last year.

Year-to-date, the Vanguard Total Bond Market Index Fund, with over USD 300 billion in assets, posted a 5.28% return as of last week, up from negative 13.16% last year. PIMCO’s flagship USD 132 billion bond fund, the Income Fund, had year-to-date returns of 8.92% as of last week, from minus 7.81% last year.

Though not everyone sees a recession ahead, most bond bulls are counting on slowing US economic growth and ebbing inflation to push the Fed to cut interest rates.

Eoin Walsh, partner and portfolio manager at TwentyFour Asset Management, said 2023’s rise in yields means fixed income can offer the best of both worlds – income with the potential of capital appreciation.

“From where we are right now, you are going to get your yield on Treasuries and you probably will get a capital gain as well,” he said.

He expects 10-year yields to be between 3.5% and 3.75% by the end of next year.

Others believe some parts of the Treasury yield curve may have already rallied too far.

Rick Rieder, chief investment officer of global fixed income at BlackRock, said the recent rally has left both longer-dated and shorter-dated bonds “quite rich.” “Much of the 2024 return for the very front end and for the very back end … has already been achieved,” he said.

At the same time, concerns over wide fiscal deficits and expectations of increased bond supply could boost term premiums – or the compensation investors demand for the risk of holding long-term bonds. Meanwhile, demand could lag as the Fed and large foreign buyers such as China trim their Treasuries holdings.

The recent bond rally has also eased financial conditions, a measure of the availability of funding in an economy. Some worry that could fuel a rebound in growth or even inflation, delaying the Fed’s rate cuts.

The Goldman Sachs Financial Conditions Index has fallen by 136 basis points since late October and on Dec. 19 stood at its lowest level since August 2022.

“The more markets move to price in cuts, the less urgency the Fed should probably feel about delivering them, because the markets are doing the easing for them,” said Jeremy Schwartz, US economist at Nomura.

(Reporting by Davide Barbuscia, editing by Ira Iosebashvili and Anna Driver)

 

Dec 26 – Benchmark US 10-year Treasury yields on Tuesday dipped slightly to open the final week of 2023.

The yield on 10-year Treasury notes was down 0.9 basis points to 3.899%, while the yield on the 30-year Treasury bond was down 0.6 basis points to 4.054%.

Market movement in the last week of the year is typically quiet, as many traders take holidays to cap off the year. US markets were closed Monday due to the Christmas holiday.

The move down in longer-dated Treasury yields comes after the previous week’s economic data pointed to weakening inflation.

Markets are now pricing in interest rate cuts by the US Federal Reserve as early as March next year. Traders see as much as 152 basis points in rate cuts by the end of 2024.

New home price data on Tuesday served as a further sign of encouragement. Home prices rose 4.8% in October from the prior year, according to S&P CoreLogic Case-Shiller’s national home price index, marking the largest annual gain in 2023.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -45.5 basis points.

“The yield curve is flattening,” said Tom di Galoma, managing director and co-head of global rates trading at brokerage BTIG.

“It looks like the Fed will be cutting rates in 2024. My estimate is for that to happen by mid-2024,” he said.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, lost much of its previous gains on the day following strong results of Tuesday’s USD 57 billion Treasury auction, which saw demand nearly three times the amount sought. The two-year yield was last up 1.2 basis points at 4.349%

December 26 Tuesday 1:40PM New York / 1840 GMT

	Price	Current Yield %	Net Change (bps)
Three-month bills	5.2225	5.3758	-0.003
Six-month bills	5.075	5.2909	-0.009
Two-year note	100-244/256	4.352	0.012
Three-year note	100-222/256	4.0613	0.005
Five-year note	102-42/256	3.8875	0.000
Seven-year note	102-192/256	3.9174	-0.006
10-year note	104-228/256	3.8986	-0.009
30-year bond	112-8/256	4.0518	-0.008

 

(Reporting by Matt Tracy; Editing by Chizu Nomiyama and Chris Reese)