Treasuries See 2024 Gains Dwindle With December Fed Cut at Risk

(Bloomberg) — A two-month slump has all but wiped out the US Treasury market’s gains for the year, as traders brace for Donald Trump’s return and also the chance of slower interest-rate cuts from the Federal Reserve.

Most Read from Bloomberg

A Bloomberg index of Treasury returns has seen its 2024 advance shrink to about 0.7% from a peak of 4.6% on Sept. 17, the day before the Fed reduced borrowing costs for the first time since 2020.

It marks a disappointing run of losses in the world’s biggest bond market, which has been battered by signs of a resilient US economy and the expectation that Trump’s election victory will usher in quicker inflation given his campaign promises such as steeper tariffs and lower taxes.

“The Treasuries market is struggling to find the North Star,” said Ed Al-Hussainy, a New York-based strategist at Columbia Threadneedle. “There are too many moving parts.”

Investors had anticipated that Fed easing would bring a windfall. Instead, 10-year yields have soared almost three quarters of a point since Sept. 18, marking the biggest jump in the first two months of a rate-cutting cycle since 1989.

Buyers Emerge

Buyers did step in on Friday as 10-year yields rose to 4.5% for the first time since May, showing some investors are holding out hope for a positive annual return in 2024.

Others may be reluctant to conclude that the market’s slide is over as doubts grow around how much further the Fed can drop rates. Next month’s decision is now seen as close to a coin flip after Fed Chair Jerome Powell said last week that the central bank isn’t “in a hurry” to cut.

It all leaves the market potentially in a state of limbo until the next round of crucial data, starting with the Fed’s preferred gauge of inflation at month-end, the first in a series of reports that may dictate what officials do in December.

Ten-year yields reached their peak last week on Friday after a solid report on retail sales. Bloomberg’s Economic Surprise Index jumped to the highest since February, signaling economic data are surpassing expectations.

Traders are now pricing in a total of about three quarters of a point of cuts over the next 12 months, roughly half of the easing reflected for that period back in September.

Following the selloff of the past couple months, the 10-year benchmark note “appears cheap,” but the valuation is still not compelling enough to present a buying opportunity, JPMorgan Chase & Co. strategists led by Jay Barry wrote in a note last week. They “prefer to be patient in fading these recent moves.”

For bond investors, it’s another setback in a year marked by false hopes. The Treasury market delivered a return of more than 8% from late April to mid-September, sparking short-lived visions of a solid 2024 performance.

Investors would have been better off stashing their money in Treasury bills, the equivalent of cash, pocketing a return of roughly 4.6% so far in 2024. US government bonds are on course to trail cash returns for a fourth straight year, the longest stretch since Bloomberg data starting in 1991.

For Mark Dowding, chief investment officer at RBC BlueBay Asset Management, the declines in longer-term bonds aren’t over. He’s betting that 30-year yields will rise toward 5%, a level last seen in November 2023, as he expects the Trump administration may widen budget deficits via tax cuts. The bond yields roughly 4.6% now.

“The risk from the fiscal side and debt issuance means that investors are going to demand greater risk premium,” he said.

What to Watch

Economic data:
- Nov. 18: New York Fed services business activity; NAHB housing market index; TIC flows
- Nov. 19: Housing starts; building permits
- Nov. 20: MBA mortgage applications
- Nov. 21: Philadelphia Fed business outlook; jobless claims; leading index; existing home sales; Kansas City Fed manufacturing activity
- Nov. 22: S&P Global US manufacturing PMI; S&P Global US services PMI; S&P Global US composite PMI; University of Michigan sentiment; Kansas City Fed services activity
Fed calendar:
- Nov. 18: Chicago Fed President Austan Goolsbee
- Nov. 19: Kansas City Fed President Jeff Schmid
- Nov. 20: Governor Lisa Cook; Governor Michelle Bowman
- Nov. 21: Cleveland Fed President Beth Hammack; Goolsbee; Vice Chair for Supervision Michael Barr; Bowman
Auction calender:
- Nov. 18: 13-, 26-week bills
- Nov. 19: 42-day CMB
- Nov. 20: 17-week bills; 40-day CMB; 20-year bonds
- Nov. 21: 4-, 8-week bills; 10-year TIPs reopening