US government bonds are on track to achieve their longest winning streak in three years as traders anticipate a potential shift in Federal Reserve policy. Treasuries have returned 1.5% through August, positioning them for a fourth consecutive month of gains—the longest streak since July 2021, according to the Bloomberg US Treasury Total Return Index. This index has been climbing since late April, with year-to-date gains approaching 3%, reflecting growing investor confidence in the possibility of lower US borrowing costs.
Recovery from April Losses
The bond index has rebounded from a 2.3% loss recorded in April. This recovery has been supported by signs of cooling inflation and moderating job growth, which provide the Federal Reserve with greater flexibility to lower rates from their highest levels in over two decades. Treasury 10-year yields fell to a 14-month low of 3.67% in early August following weaker-than-expected US payroll data but have since increased to 3.86% as of Friday.
Market Insights and Federal Reserve Signals
Tiffany Wilding, an economist at Pacific Investment Management Co., highlighted the ongoing appeal of the bond market, stating in an interview with Bloomberg Television, “The bond market is still an interesting place to be. We see a lot of value despite the recent rally.” At the Jackson Hole symposium last week, Fed Chair Jerome Powell indicated that “the time has come for policy to adjust,” signaling a potential shift in the central bank’s approach to managing inflation. The Fed has maintained its benchmark rate within the 5.25% to 5.5% range since July 2023.
Expectations for Federal Reserve Policy
Swap traders are currently pricing in approximately 100 basis points of rate cuts this year, suggesting a reduction at every remaining policy meeting through December, including a possible 50-basis-point cut. Short-term notes, which are more responsive to Fed policy, have outperformed this month, pushing a key segment of the yield curve towards positivity for the first time since July 2022. The two-year yield is now less than five basis points above its 10-year counterpart, a significant narrowing from over 100 basis points in March 2023, which represented the steepest inversion since the 1980s.
Concerns Over Market Overextension
Despite the positive performance, there are concerns that the bond rally may be overextended. Risks include a stabilization in the labor market that could prompt the Fed to ease monetary policy at a slower pace than anticipated by the market. The bond market’s winning streak saw a pause on Thursday following data indicating resilient economic performance, with second-quarter US GDP growth and weekly jobless claims reflecting a stable economy.
Conclusion
As Treasuries approach their longest winning streak in recent years, market participants are closely monitoring developments in Federal Reserve policy and economic indicators. The potential for rate cuts and evolving economic conditions will continue to influence bond market dynamics in the coming months.
Related Topics:
