In a year in which little has gone right in the US bond market, November turned out to be a month for the record books.
Investors frantically bid up the price of Treasuries, agency and mortgage debt, sparking the best month since the 1980s and igniting a powerful pan-markets rally in everything from stocks to credit to emerging markets. Even obscure cryptocurrencies, the sort of speculative, uber-risky assets that struggled when yields were soaring, posted big gains.
For those bond investors bracing for a possible third straight year of losses — an unprecedented streak in the Treasuries market — the rally was desperately needed. The Bloomberg US Aggregate Index has returned 4.9% this month through Wednesday as the yield on the 10-year bond, the benchmark for everything from home loans to corporate debt, sank close to 0.65 percentage points to 4.29%.
Whether the rally extends into December and then 2024 depends on if the principal forces behind it — signs that the economy and inflation are slowing and that the Federal Reserve is done hiking interest rates — keep building. Cooling jobs data and soft consumer inflation figures proved a boon for bonds in November, while dovish comments from Fed Chair Jerome Powell to Governor Christopher Waller added fuel to the advance.
“We’ve been getting economic data recently that reinforces the idea of the Goldilocks slowdown,” said Rebecca Patterson, former chief investment strategist at Bridgewater Associates. “Inflation is coming down, and at the same time it hasn’t been unduly impinging growth.”
Signs of a so-called soft landing for the US and global economy and plunging borrowing costs have sent the MSCI World Index soaring 8.9% this month, while emerging-market shares have gained 7.4%. The Bloomberg Galaxy Crypto Index, which measures the performance of the largest digital currencies, advanced 18%.
In credit, US junk bonds have rallied more than 4%, the most since July 2022, as investors plowed a record $11.9 billion into exchange-traded funds tracking the asset class, the most ever, according to data compiled by Bloomberg.
“There’s a little bit of the fear of missing out,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investment. “Suddenly 5% yields on the 10-year Treasury have become a distant memory.”
Treasuries are at the heart of a global story, with a Bloomberg gauge of sovereign and corporate debt returning over 5% in November, the most since 2008. On Thursday, the rally in European government bonds extended as inflation readings across the region came in lower than expected. Traders also brought forward bets for European Central Bank rate cuts, pricing a first quarter-point reduction in April and a deeper easing cycle.
On the other side of the Atlantic, the string of soft data and dovish Fedspeak are similarly bringing forward expectations for US interest rate cuts. Traders are now pricing in about 1.15 percentage points of policy easing for 2024, with the first cut now expected at the central bank’s May meeting, according to data compiled by Bloomberg. Billionaire Bill Ackman said recently he expects the Fed to act even sooner, saying cuts could come in the first quarter.
Such a quick pivot could prompt a flood of short covering, market watchers say. In fact, given the magnitude of this month’s move, it’s likely that long-time bears such as commodity trading advisers are already headed for the exits, according to Vineer Bhansali, founder of the Newport Beach, California-based asset-management firm LongTail Alpha.
“These types of massive moves can really only be ascribed to positioning changes,” Bhansali said, adding that he’s positioned for the yield curve to steepen. “I can see two-year notes rallying 50 to 100 basis points if this Fed pivot is really going to happen. And if that doesn’t happen relatively soon, then 10-year yields will go back to the 4.5% to 5% range.”
Yields above 5% last month persuaded active bond managers at Pacific Investment Management Co., Doubleline Capital, Capital Group and Columbia Threadneedle, among others, to load up on longer-dated debt. This week’s JPMorgan Chase & Co. client survey revealed that active investors have only kept adding to those bets, with so-called net longs jumping to a record 78% of those surveyed.
Among the bigger winners, Western Asset Management’s core plus bond fund has gained 6% in the past month, topping 98% of peers and pushing the $22 billion fund back into positive territory for the year.
Conceding they had been too early anticipating an end to Fed tightening and lower inflation, portfolio manager Mark Lindbloom noted that “it’s been a very painful adjustment over the last year and a half.”
Western Asset has shifted more of its rate exposure to the two- and five-year sectors from the long-end, while remaining overweight agency mortgages, he said.
“In the last 25 years the Fed has been through five tightening cycles and when they get to that last tightening and arguably we’ve seen that for six months down the road, you see the two-year or five-year rally substantially,” Lindbloom said.
What Bloomberg Strategists Say...
“Markets around the world seem to be priced for a single global outcome next year based on the trajectory of inflation: rate cuts, and oodles of them. Yet, experience from New Zealand to Norway suggests that such pricing is suspect, for the biggest economies all face vastly varying degrees of inflation.”
— Ven Ram, cross-assets strategist
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