The sudden shift in the bond market has highlighted the sense that 5% Treasury yields — as seen in October — were too good to pass up, extending a rally for many fixed income funds that not so long ago were expecting another poor performance this year. A Bloomberg Treasury index is up 3.5% this year through Dec. 15, after losing an unprecedented 12.5% last year and 2.3% in 2021.

Bearishly positioned players however lost out, a trend highlighted on Friday after New York Fed President John Williams said talk of a potential rate cut by March is “premature.” After an upward spike in yields, buyers quickly stepped in and left rate cut expectations little changed. Swaps show a roughly 80% chance that the Fed cuts rates as early as March. In total, the market expects 1.64 percentage points of easing by the end of 2024.

In Europe, investors are also trying to figure out how to trade the pivot even as central banks there pushed back on market expectations. For the euro-area central bank, traders see six quarter-point cuts in 2024, while in the UK, bets are on 115 basis points of easing next year, which translates into four quarter-point cuts with a fifth hanging in the balance. That’s 40 basis points more than a week ago.

So long as forthcoming data supports that narrative, overall sentiment in the bond market will likely remain bullish, with any back ups in yield being bought.

Still, there are potential pitfalls along the way, said Michael de Pass, global head of rates trading at Citadel Securities LLC. “Certainly all markets really seem to be pricing a soft landing to perfection at this stage and any deviation from that narrative leaves the risk of a repricing,” he said.

This article was provided by Bloomberg News.

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