US Treasuries are off to the strongest start to a year since 2001, when markets correctly anticipated that then-Federal Reserve Chairman Alan Greenspan would slash the central bank benchmark.
(Bloomberg) — US Treasuries are off to the strongest start to a year since 2001, when markets correctly anticipated that then-Federal Reserve Chairman Alan Greenspan would slash the central bank benchmark.
Investors scooped up government debt on the first trading day of 2023 too, spurred by wagers that the Fed, now under the stewardship of Jerome Powell, will further slow the pace at which it’s been hiking rates. The pullback in expectations for central bank hikes comes as inflation shows signs of slowing and concern mounts about the prospects of a US economic slump this year.
The benchmark 10-year yield fell close to 14 basis points to 3.74%, marking the steepest drop on the first trading day of a new year since 2001. The yield had dropped as much as 15.5 basis points earlier in the session, before a cascade of new corporate bond sales briefly restrained the market. The move on the first day of 2001 was close to 20 basis points, with traders piling into Treasuries as recession fears fueled bets on a move by Greenspan, which did in fact come the next day.
Tuesday’s surge in Treasury buying followed gains in German bonds after year-on-year inflation figures for two regional states slowed for a second month, a sign price pressures may be easing. Lower oil prices supported improved sentiment in the Treasury market, which suffered a record annual loss in 2022 as soaring inflation drew an aggressive response from the Fed. While yields ended the year off their highs, bond bears had the upper hand during the final two weeks of December, especially in Europe.
Australia and New Zealand bonds echoed the rally in Treasuries on Wednesday, with yields falling in early Asia trading.
“The last two weeks of 2022 can be aptly characterized as a bearish phase in US rates” during a seasonally volatile period, Ian Lyngen, head of US rate strategy at BMO Capital Markets, wrote in a note. “As investors return from the long weekend we’re anticipating ‘cooler heads’ will prevail.”
The policy-sensitive two-year yield erased some of its earlier move, finishing down around 6 basis points at 4.37%. Money markets were pricing in 66 basis points of additional Fed hikes by June, which would take the benchmark effective rate to a little under 5%. The Fed itself has forecast a 5%-5.25% peak range for its policy rate, the median of its policy makers’ forecasts for 2023, released in December. That’s three quarters of a percentage point above where the target range is now.
Treasuries held around half of their gains as companies lined up to sell dollar-denominated debt after a two-week hiatus during the holiday period. Dealers expect a weekly total of $35 billion to $40 billion.
“The corporate calendar is generally large in January, but for the first trading day of a year this is impressive and a sign of the times,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities.
Tuesday’s move renews a recovery for Treasuries that gathered pace in November as the pace of price growth moderated and central bank officials pointed to a less-aggressive tightening path.
The economic calendar will dominate the remainder of the week, with a key manufacturing survey and job-openings data due Wednesday, before the December employment report is released Friday.
The US labor market has been resilient, with solid wage growth helping spur service sector inflation. That’s attracting the focus of Fed officials and is likely to feature when the December meeting minutes are released on Wednesday. Wage gains are forecast to have run at an annual pace of 5% in December, while payrolls are expected to rise 200,000.
–With assistance from Ruth Carson.
(Updates with Australia bonds in fifth paragraph. An earlier version of this story was corrected to amend the sub-heading on the chart.)
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