Evening Brief – 11.30.23
The Most Powerful Bond Rally in 40 Years
Investors are raising the odds that the Federal Reserve will soon begin slashing interest rates, a bet that has gone into turbo-drive this week, sparking the most powerful bond market rally in four decades.
US Treasuries have gained at the fastest monthly rate since 2008, thanks in significant part to dovish comments on Tuesday from Federal Reserve Governor Christopher Waller.
“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to (the Fed’s target of) 2%,” Waller said. “If we see disinflation continuing for several more months — I don’t know how long that might be, three months, four months, five months… you could then start lowering the policy rate just because inflation’s lower.”
The policy-sensitive U.S. 2-year Treasury yield has fallen substantially from 4.96% last Friday to 4.60% on Wednesday, the lowest level since July.
The U.S. 2-year yield is dropping significantly relative to the Fed’s current target range of 5.25%-5.50%. This indicates that the market is pricing in greater odds that rates have peaked, and cuts are on the way.
Further evidence that rate cuts may be coming can be found in the Bloomberg index of global sovereign and corporate debt, which returned 4.9% in November, its highest monthly gain since December 2008 recessionary period.
In addition, just one month prior, the Bloomberg Global Aggregate Total Return index was down as much as 3.8% for the year, having bottomed out in the middle of October. For 2023, the index is presently up 1.4%.
The last month that saw a stronger rally than the current one was in December 2008, when the Fed dropped rates to zero, committed to increasing lending to the banking sector following the bankruptcy of Lehman Brothers, and began QE. The Bloomberg global debt index increased 6.2% that month.
In their September estimates, FOMC members predicted another hike in interest rates this year, which they haven’t done yet, and a half-point drop in 2024. They will revise those projections during their meeting on December 12-13.
Meanwhile, Fed funds futures are pricing the end of rate hikes. The market expects the central bank to keep its target rate unchanged at the next two policy meetings, with the March meeting split between keeping rates steady and cutting them.
It’s still premature to declare that a new bond bull market has begun, but the chances are obviously tilting in that direction. Incoming inflation figures will almost certainly be key in determining what happens next.