To think it was not that long ago that Treasuries were one of the year’s worst performing assets and only managed to erase their 2023 losses two week ago.
Back on Nov 20, Bloomberg wrote that after rising modestly its US Treasury Index was again back where it ended 2022, erasing losses of as much as 3.3% earlier this year. As a reminder, exiting the catastrophic 2022, most investors anticipated that 2023 would be the “year of the bond,” but were instead hit by waves of turmoil as a “resilient” US economy (largely thanks to Biden’s department of goalseeked seasonal adjustments) prompted the Fed to extend its steepest tightening cycle for another year.
Fast forward just a few days to today, when the cross-asset rally (and USD tumble) has accelerated substantially, and thanks to several dovish comments from the likes of Fed governor Waller, US Treasuries are now climbing at the fastest monthly pace since 2008. At the same time, in a repeat of the infamous QE trade, the MSCI All Country World Index of stocks has gained 8.7% so far this month, its most since November 2020!
Some more details: the Bloomberg gauge of global sovereign and corporate debt has returned 4.9% in November, its biggest monthly gain since it surged 6.2% in the depths of the recession in December 2008.
This is remarkable because the Bloomberg Global Aggregate Total Return index was down as much as 3.8% for the year just one month earlier, having bottomed in mid-October. The gauge is now up 1.4% for 2023.
The last month that saw a stronger rally than the current one was December 2008 when the Fed cut rates to zero, pledged to boost lending to the financial sector following the collapse of Lehman Brothers Holdings and started QE. That month, the Bloomberg global debt index jumped 6.2%.
According to Bloomberg’s Garfield Reynolds, November’s rally is being driven by increasing speculation the Fed and its global peers have largely finished hiking interest rates and will start cutting next year. Markets price a full percentage point of reductions in the US next year, with the cycle starting in June by when the market now expects almost 2 full rate cuts.
As noted earlier, while Fed Governor Waller helped bolster rate-cut bets on Tuesday, when he said the current level of policy looks well positioned to slow the economy and bring down inflation, the move accelerated after Bill Ackman flip-flopped later in the day and repeating Waller’s words almost verbatim, said the easing will start even earlier than traders anticipate.
“Waller has been a hawkish tilting member, so for him to sound dovish has been significant,” said James Wilson, portfolio manager at Jamieson Coote Bonds. “It sounds like the Fed is all but done in their hiking cycle.”
Treasuries extended this month’s gains Wednesday. US 2- and 10-year yields both slid as much as seven basis points to 4.66% and 4.25% respectively before rebounding modestly. Australian bonds surged, sending 10-year yields tumbling 14 basis points, after weaker-than-expected local inflation data spurred traders to start betting policymakers are done hiking.
In Europe, German 10-year yields fell to 2.42%, the lowest since July, after national inflation numbers also came below expectations. Similar-dated UK yields dropped for a third day to a one-week low at 4.12%.
And this may just be the beginning: as the following chart of conditional forecasts of CTA trading from Goldman shows, should yields fail to rebound, CTA buying of the entire curve is about to go into overdrive, sending yields plunging even more.
Traders also added to rate-cut bets by the European Central Bank, pricing a full percentage point of easing next year with the first move in June. At the end of last week, swaps implied about 80 basis points of reductions.
For some, markets are getting ahead of themselves in pricing such magnitude of cuts. Justin Onuekwusi, chief investment officer at St. James’s Place, said the ECB has been very hawkish on inflation and will likely start easing just toward the end of next year.
As Bloomberg reminds us, in their most recent forecasts in September Fed officials anticipated hiking rates once more this year — which they haven’t done so far — and cutting rates by half a percentage point in 2024. They will update those forecasts at their Dec. 12-13 meeting.
“The Fed is providing parameters for the potential of looser policy,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities in New York.
The plunge in yields has meant more than just a surge in stocks: the current dovish shift in central-bank expectations has also been a boon for corporate bonds where spreads on investment-grade global company debt are hovering around the lowest levels since April 2022. They have narrowed over the past month as investors rushed to snap up the securities amid increased optimism about a soft landing for the US economy. The average yield on corporate bonds retreated to about 5.3% this week after climbing to almost 6% in October, the highest since 2009.