Treasury bonds erase this year's losses amid rebound from historic collapse

• Treasury bonds have erased this year's losses amid a rebound from their historic collapse.
• After falling as much as 3.3% earlier this year, the Bloomberg US Treasury Index is now roughly flat.

Treasury bonds have erased this year's market losses amid mounting optimism that monetary policy could soon turn dovish.

After falling as much as 3.3% earlier this year, the Bloomberg US Treasury Index is now roughly back where it was at the end of 2022.

This comes after Treasurys lost 2.3% in 2021 and a record 12.5% in 2022, when the Federal Reserve began its aggressive rate-hiking campaign to rein in high inflation.

The hawkish stance sparked a historic crash in long-dated bonds, which suffered 46% losses between March 2020 and early October.

Worries about ballooning federal deficits and oversupply of new Treasury debt further fueled the bond sell-off over the summer, sending long-duration yields soaring to levels not seen since 2007.

For instance, rates on both the 10-year note and 30-year bond topped 5% in the later half of October. Treasury auctions also provided little relief, as traders balked at picking up newly issued bonds.

But since then, US job growth data has cooled significantly while inflation has continued to come down as oil prices ease.

Now, fed funds futures markets are confidently indicating expectations of a Fed pause through this year, before a potential interest rates cut in March.

Yields have fallen, sending bond prices higher. And so far in the month of November alone, the Bloomberg US Treasury index is up 2.8%, its largest increase since March.

Added to that, the recent Treasury auction of 20-year bonds saw demand rebound, further driving yields down. As of Tuesday, the 30-year rate has settled at 4.576%.

Still, Wall Street is mixed on how the market will perform in the next year. While room remains for yields to climb down amid eventual interest rate cuts, there's still unresolved risk from high US deficits and even more Treasury issuance.

In a recent 2024 outlook, JPMorgan predicted yields will fall, but warned investors to not jump in too soon.

"We forecast 10-year yields fall to 3.75% and 5s/30s steepens to 75bp by YE24. Stay patient before initiating duration longs given expected time to first ease and dovish Fed path currently priced in. Instead, we favor long-end steepeners, particularly if the term premium continues to rise," analysts wrote.