According to a Reuters report on Wednesday (27th), as U.S. Treasuries emerge from a historic sell-off, some investors predict that as long as the Federal Reserve’s (Fed) interest rate cuts work as expected, the U.S. fixed income market will decline next year. Get better.
The fourth-quarter rebound saved Treasuries from an unprecedented third straight year of losses in 2023, following their worst-ever decline a year ago. U.S. Treasury bond prices hit their lowest levels since 2007 in October this year.
Market expectations that the Fed is likely to end its interest rate hike cycle and cut borrowing costs next year have pushed stocks higher. Expectations gained support when policymakers unexpectedly cut interest rates by 75 basis points in their December economic forecast amid signs that inflation is continuing to cool.
Lower interest rates are expected to push U.S. Treasury yields lower and push bond prices higher – an outcome many investors expected. The latest survey of fund managers by BofA Global Research shows that investors’ bond holdings have reached the highest level since 2009.
Still, few believe the path to lower yields will be smooth. Some people worry that U.S. Treasury yields have fallen by more than 100 basis points since October, reflecting expectations of a rate cut, but if the Fed does not cut interest rates soon or not soon enough, the bond market may retreat.
Futures tied to the Fed’s key policy rate show market expectations for a rate cut next year of about 150 basis points, twice what policymakers expect. The benchmark 10-year U.S. Treasury yield fell to 3.88% last week, its lowest level since July last year.
On the other hand, many are also wary of a return to U.S. fiscal concerns that helped push yields to a peak in 2023 only to recede in the second half of the year.
“As long as the Fed isn’t completely wrong, we should see some rate cuts next year,” said Brandon Swensen, senior portfolio manager on the BlueBay fixed income team at RBC Global Asset Management. “However, it could be a bumpy road.”
bond price return
U.S. bonds, including interest payments and price changes, had returned 4.8% year-to-date as of last week, compared with negative 13% last year, according to the Bloomberg US Aggregate Bond Index.
“Bonds are back,” Vanguard Group, the world’s second-largest asset manager, said in an outlook report earlier this month. The company estimates that the return on U.S. Treasury bonds will be 4.8% to 5.8% over the next 10 years, compared with 1.5% to 2.5% before the interest rate hike cycle began last year.
So far this year, the Vanguard Total Bond Market Index Fund, which has more than $300 billion in assets, has returned 5.28% as of last week, up from negative 13.16% last year. As of last week, PIMCO’s $132 billion flagship bond fund, the Income fund, had returned 8.92% so far this year, compared with negative 7.81% last year.
While not everyone believes there will be a recession ahead, most bond market bulls are counting on slowing U.S. economic growth and falling inflation to prompt the Fed to cut interest rates.
Eoin Walsh, partner and portfolio manager at 24th Asset Management, said rising yields in 2023 meant fixed income could offer the best of both worlds – both income and the potential for capital appreciation. He predicts that by the end of next year,10-Year Treasury Bond YieldIt will be between 3.5% and 3.75%.
Bond gains also ease financial conditions
Others believe that some parts of the U.S. Treasury yield curve may have risen too much.
Rick Rieder, chief investment officer of BlackRock’s global fixed income division, said the recent gains have made both longer-term and shorter-term bonds “pretty rich.” “Most of the returns in 2024 for both front and back have already been realized,” he said.
At the same time, concerns about widespread fiscal deficits and expectations of an increase in bond supply are likely to push up term premiums — the compensation investors demand for the risk of holding long-term bonds. At the same time, demand is likely to lag as large foreign buyers such as the Fed and China reduce their holdings of U.S. Treasuries.
The recent rise in bond prices has also eased financial conditions, a measure of an economy’s availability of financing. Some worry that this may push economic growth or even inflation to rebound, thereby delaying the Fed’s interest rate cuts.
The Goldman Sachs Financial Conditions Index has fallen 136 basis points since the end of October, falling to its lowest level since August 2022 on December 19.
Jeremy Schwartz, U.S. analyst at Nomura Securities, said that the more the market tends to reflect an interest rate cut, the less urgent it may be for the Fed to implement an interest rate cut because the market is already preparing for the Fed.
2023-12-27 12:50:04
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