US Treasuries Poised for Best New-Year Start in Two Decades

US Treasuries headed for the strongest start to a year in more than two decades as investors scooped up government debt on wagers the Federal Reserve will further slow its pace of rate hikes as inflation cools.

The benchmark 10-year yield fell as much as 15.5 basis points to 3.72%, a slide beaten only by the 20 basis-point tumble on the first day of trading in 2001. Its German counterpart dropped 5 basis points to 2.38% after year-on-year inflation figures for two regional states slowed for a second month, a sign price pressures may be easing. Overall German inflation subsequently slowed more than forecast in December.

Lower oil prices also supported improved sentiment in the Treasury market, which suffered a record annual loss in 2022 as soaring inflation drew an aggressive response from the Fed. While yields ended the year off their highs, bond bears had the upper hand during the final two weeks of December, especially in Europe.

“The last two weeks of 2022 can be aptly characterized as a bearish phase in US rates” during a seasonally volatile period, Ian Lyngen, head of US rate strategy at BMO Capital Markets, wrote in a note. “As investors return from the long weekend we’re anticipating ‘cooler heads’ will prevail.”

Money markets are pricing 62 basis points of Fed hikes by May, a 1-basis-point drop on the week, while the European Central Bank is expected to raise the deposit rate to 3.51% by July, 4 basis points less than was banked in on Monday. The Fed itself has forecast a 5%-5.25% peak range for its policy rate, the median of its policy makers’ forecasts for 2023, released in December.