“Expectations of 2023 being the year of the bond have not been fully met,” Chris Iggo, chief investment officer of core investments at AXA Investment Managers, said in a Dec. 8 report, before the post-Fed surge in Treasuries. “The performance of government bond markets has been disappointing.”
Goldman Sachs was among a handful to correctly predict what happened, and its team, led by Praveen Korapaty, now says again that the rally will lose steam in 2024.
Others are just kicking the ‘buy bonds’ mantra into a new year. Analysts at Jefferies International Ltd. told clients on Dec. 11 that “we expect 2024 to be the year of fixed income” with bonds outperforming equities as central banks embark on rate cuts. Still, the authors said, “With due respect to analysts across the spectrum, it is likely that 2024 will be another challenging year for macro forecasts.”
Differences between yield forecasts also take into account views on how long the Fed will continue to let its holdings of Treasuries run-off at the pace of $60 billion per month as it moves to offload bonds bought during the pandemic. So-called quantitative tightening, or QT, puts upward pressure on longer-term yields by requiring more debt be sold to service the US’s massive fiscal deficits.
For example, NatWest calls for even more Fed rate cuts in 2024 than TD, but — per a note in early December — expects QT to continue through year-end; TD by contrast expects it to stop when monetary easing begins.
Likewise, JPMorgan and Morgan Stanley have relatively bullish 10-year yield forecasts despite conservative expectations for Fed rate cuts. Both see scope for QT to continue through next year.
And regardless of the pace of the Fed’s balance-sheet unwind, investors are divided over the economic outlook that will ultimately steer policymakers’ path. The prospects of a soft landing, the stickiness of inflation, and the power of the central bank’s policy are all hard to predict, said Sit Investment Associates’ Doty.
“With those three wide-ranging outlooks, you’re going to have an incredible range on interest-rate projections.”
This article was provided by Bloomberg News.