Treasuries see gains easing into 2024 as the Fed’s December rate cut is in jeopardy

(Bloomberg) — A two-month slump has all but wiped out the U.S. Treasury market’s full-year gains as traders brace for the return of Donald Trump and also the chance of slower rate cuts from the Federal Reserve.

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A Bloomberg index of Treasury yields has seen advances shrink to about 0.7% through 2024, down from a peak of 4.6% on September 17, the day before the Fed cut borrowing costs for the first time since 2020.

It marks a disappointing set of losses in the world’s largest bond market, which has been battered by signs of a resilient U.S. economy and expectations that Trump’s election victory will lead to faster inflation given his campaign promises such as higher rates and lower taxes.

“The government bond market is struggling to find the North Star,” said Ed Al-Hussainy, a New York-based strategist at Columbia Threadneedle. “There are too many moving parts.”

Investors had expected the Fed’s easing to provide a windfall. Instead, 10-year yields have risen nearly three-quarters of a point since September 18, marking the biggest jump in the first two months of a rate-cutting cycle since 1989.

Buyers are coming forward

Buyers did intervene on Friday as 10-year yields rose to 4.5% for the first time since May, showing some investors are hopeful of positive annual returns in 2024.

Others may be reluctant to conclude that the market’s decline is over as doubts grow about how much further the Fed can cut rates. Next month’s decision is now seen as a coin flip after Fed Chairman Jerome Powell said last week that the central bank is in no “rush” to cut spending.

All this leaves the market potentially in a precarious position until the next round of crucial data, starting with the Fed’s preferred inflation measure at the end of the month, the first in a series of reports that could determine what officials expect in December will do.

Ten-year yields peaked last Friday after a solid retail sales report. Bloomberg’s Economic Surprise Index rose to its highest level since February, indicating economic data is beating expectations.

Traders are now pricing in a total of around three-quarters of a point in cuts over the next 12 months, about half the easing reflected for that period in September.

After the sell-off of the past few months, the 10-year benchmark looks “cheap,” but the valuation is still not compelling enough to present a buying opportunity, JPMorgan Chase & Co. strategists wrote. led by Jay Barry in a note last week. They “prefer to be patient as these recent moves fade.”

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