US Treasury bonds have notched their best winning streak since March, logging four consecutive weeks of gains. Investor confidence in an imminent interest rate cut by the Federal Reserve next quarter has been a driving force behind the rally. Rates fluctuated on Friday as the market closed early at 2 p.m. New York time. A report revealing that the Fed’s preferred measure of underlying inflation barely rose in November reinforced the expectation of aggressive monetary policy easing in 2024.
Money managers have been flocking to Treasuries in recent weeks, with Citigroup describing the positioning as now at “extremes.” Asset managers have placed significant bets on ultra-long bond futures, tracking the 30-year maturity, reaching levels not seen since August 2019. Swaps contracts tied to Fed meetings suggest a high probability of the central bank lowering its current 5.25% to 5.5% target rate range in March.
Traders are pricing in nearly 160 basis points of rate reductions across 2024, more than double what Fed officials indicated in their recent quarterly forecasts. The slowest year-over-year core inflation in almost three years has intensified speculation about the timing of the Fed’s rate cut. While a durable goods orders report came in above estimates, it wasn’t enough to shift rate expectations significantly.
Ten-year Treasury yields closed up slightly, hovering around 3.90%, down over a percentage point from the October high of 5.02%. The abrupt turnaround in Treasuries this year has seen gains of 3.6% through December 22. Despite the positive impact of ebbing inflation, strong income figures may pose risks to the bond market by fueling consumer spending, potentially challenging the Fed’s goal of slowing economic growth.
Next week’s $155 billion round of fresh fixed-rate note and bond sales could temper further declines in yields before year-end. The US Treasury will auction $57 billion of 2-year notes on Tuesday, followed by $58 billion of 5-year notes and $40 billion of 7-year debt in the subsequent days.
While the bond market is currently on a winning streak, traders should remain cautious, considering past instances where expectations for a quick and sharp shift to monetary easing led to reversals. Bloomberg’s monthly survey indicates a median expectation for a 25-basis-point rate cut by the US central bank at the June 2024 policy meeting, followed by three more cuts in the second half of the year.
