Treasury Bonds Recover from Historic Collapse as Fed Rate Hike Expectations Diminish

According to Yahoo News, treasury bonds have recovered from their historic collapse earlier this year, erasing market losses as optimism grows that the Federal Reserve may adopt a dovish monetary policy. The Bloomberg US Treasury Index, which had fallen by 3.3% earlier this year, is now back to its level at the end of 2022. This recovery follows a record 12.5% loss in 2022 when the Federal Reserve initiated an aggressive rate-hiking campaign to combat high inflation, leading to a historic crash in long-dated bonds. Concerns about increasing federal deficits and an oversupply of new Treasury debt further contributed to the bond sell-off during the summer, causing long-duration yields to reach levels not seen since 2007. However, recent US job growth data has shown a slowdown, and inflation has continued to decrease as oil prices ease. As a result, fed funds futures markets now indicate a high likelihood of a Fed pause this year, followed by a potential interest rate cut in March. In November alone, the Bloomberg US Treasury Index has risen by 2.8%, its largest increase since March. Additionally, a recent Treasury auction of 20-year bonds saw demand rebound, further driving yields down. Despite these positive developments, Wall Street remains divided on the market's performance in the coming year, with concerns about high US deficits and additional Treasury issuance still unresolved. In a recent 2024 outlook, JPMorgan predicted that yields will fall but cautioned investors against jumping in too soon, recommending long-end steepeners instead if the term premium continues to rise.