Traders betting on a 2024 bond rally are unfazed by the recent pullback, seeing it as a chance to seize on elevated yields before the Federal Reserve starts driving down interest rates.
The dynamic was on display Friday, when bond prices dipped after the Labor Department reported that job growth unexpectedly accelerated last month. But the selloff was curtailed because buyers swooped in as 10-year Treasury yields neared 4.1%, the highest since mid-December.
The rebound — even in the face of data showing continued strength in the economy — highlighted the stark shift in sentiment over the past two months, with investors increasingly confident that the bond market is firmly recovering from its worst downturn in decades. Despite the recent backup, yields are still well below October’s peaks as traders wager that the Fed may start easing monetary policy as soon as March.
“Anything between 4% and 4.2% is a buy” for the 10-year, said Priya Misra, portfolio manager at JPMorgan Asset Management, noting that the yield was at the upper end of that range ahead of the last Fed meeting. “For 4.2% to break, we have to bring hikes back in or take out overall cuts.”
The rally that gripped the bond market during the last two months of 2023 put an end to what had been the worst losses in decades, driving Treasuries to a gain for the year and bolstering conviction that yields won’t retest the previous peaks. While investors are mindful that yields may drift higher if incoming data alters expectations about the Fed’s likely path, some big investment firms have been looking at recent drops as good times to buy.
Australian and New Zealand yields moved higher on Monday, though the moves were in line with those seen for Treasuries on Friday. The yield on Australian 10-year notes added four basis points to 4.17%, after similar-dated US rates climbed five basis points to 4.05% at the end of last week. New Zealand 10-year yields rose six basis points to 4.61%. Cash Treasuries are shut in Asian hours Monday because Japan is on holiday.
Strategists at TD Securities told clients Friday that while bonds could still slide further in the near-term they remained convinced the labor market is cooling and the 10-year Treasury yield will end 2024 at 3%.
“The bond market is not ready to give up on their optimistic assessment for Fed rate cuts this year,” said Kevin Flanagan, head of fixed-income strategy at WisdomTree. “A narrative of buying on the dips will remain, and it will take more than one jobs report to change that.”
Not all segments of the bond market are seen as sheltered from losses, with policy-sensitive two-year bonds potentially at risk to repricing if traders dial back rate-cut bets further due to the strength of the economy. And the market is facing further tests this week, with the release of the December consumer-price index reading and a $37 billion 10-year Treasury auction that will provide a key gauge of demand. There’s also focus on a public appearance by New York Fed President John Williams, who has been among officials recently pushing back on market expectations for steep rate reductions early this year.
But the Fed has held policy steady since July, and the December meeting minutes released Wednesday showed that policymakers anticipated that they would likely begin easing this year.