2023-11-30 00:05:07
US bonds are on track to record their best months in 40 years
One day before the end of the month, US bonds seemed determined to record their best monthly performance in nearly four decades, as growing optimism regarding interest rate cuts by the Federal Reserve next year halted the frenetic selling that markets witnessed in early fall.
The Bloomberg Aggregate US Bond Index, a widely tracked measure of total returns on fixed income instruments in the United States, has risen 4.3% so far in November, putting it on track for its best monthly performance since 1985.
Treasuries make up the largest group in the overall index, and while 10-year bond yields are still higher than they were at the start of the year, the recovery in recent weeks has been impressive and has allowed for a boom in other areas of the bond market.
The rise pushed the index’s total returns this year into positive territory, raising hopes that it might avoid losses for the third year in a row, which would have been an unprecedented event in nearly half a century.
Bond prices rose, as yields declined, this month, influenced by traders’ growing expectations of the end of the current US interest rate hike cycle.
Government debt prices around the world followed US Treasuries higher, leaving the Bloomberg Global Bond Index on track to record its best month since the 2008 financial crisis.
Global government debt prices mirrored the upward trend in the United States, pushing the Bloomberg Global Bond Index towards recording its best month since the global financial crisis approached its end in 2008.
Interest rate futures indicate that investors have shifted to fully pricing in a quarter-point cut by the Fed’s May meeting, compared to previous expectations for it in mid-October.
“If 1,000 portfolio managers were polled six weeks ago, none of them would have expected to reach these levels now,” said John Kirschner, portfolio manager at Janus Henderson, “but there is a lot of quick money that can move in one or two events.” Only two events,” referring to the flows that occurred in the US bond market this month.
The rise also caused yields on 10-year Treasury bonds to fall from a 16-year high of 5.02% a month ago to a low of 4.25% on Wednesday, which is below levels recorded on September 20, when the Federal Reserve published its latest forecasts. These forecasts contained a message that interest rates were expected to remain at higher levels for a longer period.
Optimistic investors were encouraged on Tuesday by comments from one of the Federal Reserve’s most hawkish policymakers, Christopher Waller, who said he was very confident that current Fed policy was well positioned to return inflation to the bank’s 2% target.
Alan Ruskin, chief international strategist at Deutsche Bank in New York, denied that this was what Waller meant, noting that the following comments had a significant impact. He added: “It certainly opens the door to lowering interest rates in the first half.”
Investor confidence was also boosted by a review of GDP data on Wednesday, which showed that inflation was slower than previously thought in the third quarter, with the personal consumption expenditures price index, the Fed’s preferred gauge for measuring inflation, revised down by 0.1 percentage point to 2.8%.
Investment-grade corporate bonds, which make up regarding a quarter of the overall index, also saw a strong rebound in November. The average premium, or spread, paid by high-quality issuers to borrow compared to the US Treasury fell to just 1.14 percentage points this week, the lowest level since February 2022.
Corporate bond funds, including those that track subprime borrowers, have seen more than $17 billion in cash flows so far in November, paving the way for the largest monthly net inflows since July 2022.
Lotfi Karoui, chief credit strategist at Goldman Sachs, told the Financial Times that the driver behind these flows was the decline in interest rate volatility, investors’ realization that they are now enjoying the best support for yields in probably 16 years, and that future expectations for monetary policy have become… More predictable.
The decline in yields also coincided with a shift in the US Treasury’s borrowing plans. After forecasting in August that they would significantly increase the size of bond auctions to cover tax shortfalls, officials said in late October that they would slow the pace of its borrowing, easing pressure on prices.
The central bank’s last meeting of 2023 concludes on December 13. While investors do not expect a change in interest rates, they will pay close attention to the Fed’s updated economic forecasts, which will be announced at the press conference that will be held following the announcement of the bank’s decision.
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