US Treasury Bonds Rebound... "Double-Digit Bond Investment Returns Expected Next Year"

Bloomberg US Treasury Index Rises 2.5% This Month
Fed Expected to Pivot in Early Next Year
Treasury Prices Rise... Recovering This Year's Losses
"Double-Digit Bond Yields Expected Next Year" Forecast

With the prolonged outlook of high interest rates, the price of U.S. Treasury bonds, which had plummeted, has surged, recovering most of this year's losses. The slowdown in soaring inflation and signs of cooling in the labor market have fueled expectations that the U.S. Federal Reserve (Fed) will begin cutting interest rates in the first half of next year.

U.S. Treasury Bond Index Rises 2.5% This Month

According to the global bond market on the 26th (local time), the Bloomberg U.S. Treasury Bond Index recorded 2182.11 as of the previous trading day on the 24th, rising 2.5% since the beginning of this month. Treasury bond prices surged as expectations grew that the Fed would shift toward cutting interest rates early next year. The decline this year has almost been fully recovered, reaching the level at the end of last year (2188.39 as of December 30).

When the Fed held the benchmark interest rate steady at 5.25?5.5% for the second consecutive time on the 1st, market sentiment reversed. The market anticipated that the tightening cycle lasting a year and a half would soon end. Amid growing expectations of a pivot (a change in monetary policy direction), subsequent consumer price and employment data provided grounds for a shift in the Fed’s stance. The U.S. October Consumer Price Index (CPI) rose 3.2%, below both the previous month’s figure (3.7%) and market expectations (3.3%). Nonfarm payroll employment also shrank to 150,000 in the last month, about half of the previous month’s 297,000.

The yield on the U.S. 10-year Treasury bond has fallen nearly 0.5 percentage points this month, currently standing at around 4.49%. The 2-year Treasury yield dropped from last month’s peak of 5.26% to about 4.97%. As bond investment sentiment expanded, more than $16 billion flowed into U.S. corporate bond funds from the 1st to the 20th of this month alone. This inflow is the largest in three years and four months since July 2020.

"Fed Pivot in First Half... Double-Digit Bond Investment Returns Next Year"

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There are forecasts that a pivot could occur as early as the first half of next year. As the economy shows signs of slowing, it is expected that the monetary authorities will inevitably cut interest rates. UBS, Switzerland’s largest investment bank, anticipates the Fed’s pivot in March next year and expects the benchmark interest rate to fall to 2.5?2.75%, about half the current level, by the end of next year. Morgan Stanley expects rate cuts to begin in June next year, while Goldman Sachs forecasts the Fed will start cutting rates in the fourth quarter of next year.

Anish Shah, Chief Investment Officer (CIO) of Public Investments at Goldman Sachs Asset Management, said, "Inflation and growth are slowing," adding, "I don’t expect the Fed’s pivot to be quick, but the direction of the journey will change." He emphasized, "Next year will be the year of bond investment," and "bond performance will be strong."

There are also projections that bond investment returns could reach double digits next year. Ira F. Judge and Will Hoffman, strategists at Bloomberg Intelligence (BI), Bloomberg’s economic research arm, said, "Given the expected tepid recovery after the onset of a recession, U.S. Treasuries will record double-digit returns next year," adding, "Concerns about the federal government’s fiscal deficit will persist, but demand for U.S. Treasuries could overwhelm supply due to expectations of monetary easing and declining inflation."

However, caution is advised against rushing into bond investments. If the U.S. economy remains in a 'Goldilocks' state?neither too hot nor too cold?it may be difficult for the Fed to accelerate rate cuts. Brian Smedley, CIO of the investment bank SynoSure Group, said, "The economy is weakening slowly, so central banks are unlikely to rush signals of a pivot," adding, "The Fed is likely to send a message of 'don’t get too excited about rate cuts right now.' This is the game we will be playing for a while."

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