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US Treasuries Poised for Best New-Year Start in Two Decades

Published 01/03/2023, 11:36 PM
© Reuters

(Bloomberg) -- US Treasuries headed for their strongest start to a year in more than two decades as investors scooped up government debt on wagers the Federal Reserve will further slow its pace of rate hikes as inflation cools. 

The benchmark 10-year yield fell as much as 14 basis points to 3.73%, a slide beaten only by the 20 basis-point tumble on the first day of trading in 2001. Its German counterpart dropped 8 basis points to 2.36% after year-on-year inflation figures for two regional states slowed for a second month, a sign price pressures may be easing. Overall German inflation subsequently slowed more than forecast in December.

Lower oil prices also 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. 

“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.” 

Money markets are pricing 61 basis points of Fed hikes by May, a 2-basis-point drop on the week, while the European Central Bank is expected to raise the deposit rate to 3.51% by July, 4 basis points less than on Monday. 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.

Treasuries held their gains even as companies lined up to sell dollar-denominated debt after a two-week hiatus during the holiday period. Nine offerings were confirmed before 9 a.m. New York time, and about the same number of additional ones were said to be under consideration. 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. 

UK bonds also joined the rally, and in earlier trade, 10-year yields were 12 basis lower to 3.55%, before trimming gains, while peak Bank of England rate wagers were pared 4 basis points to 4.7%. 

(Adds comments, updates yield levels.)

©2023 Bloomberg L.P.

 

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