Bond Market’s Dramatic Recovery Is Seen as Opening Act for Broader Revival
The world’s biggest bond market has clawed its way back after spending chunks of 2023 underwater. Now many US debt watchers see the pathway clearing for a real revival.
The Bloomberg US Treasury Index shifted earlier this month to a positive return for the year as signs of slowing inflation and measured jobs growth unleashed a rally that sent benchmark yields tumbling from their highest in more than a decade. There have been some reversals along the way — including a mild climb in yields at the end of the holiday-shortened week — but the index is still about where it was at the start of the year and the overarching tone is constructive.
Most Wall Street strategists are predicting that the trend of lower yields will persist and set the stage for broad-based gains in 2024, with longer-term rates moving down more gradually given the barrage of debt issuance needed to fund an out-sized US deficit. Of course, many of these same market experts were forecasting a big year for bonds in 2023, which so far hasn’t materialized. But there are several supporting factors to help them make their case this time.
Inflation continues to ebb, the US labor market is gradually cooling and the once relentlessly bearish commodity trading advisers community — a group that won big over the past year betting on higher yields - is slowly exiting from bearish wagers. All this is amid growing investor sentiment that the Federal Reserve’s most aggressive hiking cycle in decades is over, with the US central bank’s flip to cutting rates expected by some as soon as the first half of 2024.
“I don’t think the Fed is going to be fast to pivot” but that will be “the direction of travel,” said Ashish Shah, chief investment officer of public investing at Goldman Sachs Asset Management. “That’s because you are seeing inflation coming down as well as a deceleration of growth.” Next year “is going to be the year of bonds, with them performing well. You’ll also see a steepening of the yield curve because there is a lot of borrowing that is going to take place.”