November Rally Sets Treasury Bonds On Track For Best Month In 40 Years

U.S. government bonds are on track for their best month in nearly 40 years following a summer and early autumn sell off that saw foreign buyers all but desert the Treasury markets.

The dramatic turnaround in November came as Treasury yields dropped from 16-year highs — with the benchmark 10-year yield hitting 5% in late October — thanks to growing optimism that the Federal Reserve’s next policy move will be a rate cut, possibly in the first quarter of 2024.

The Bloomberg U.S. Aggregate Bond index (Agg), which tracks total returns on US bonds, is up 4.3% in November, setting it up for its best monthly percentage gain since 1985.

Similarly, the iShares Core U.S. Aggregate Bond ETF AGG, an exchange traded fund that tracks the Bloomberg benchmark, is up 4.1% so far this month — its best monthly performance since December 2008.

Also Read: 10-Year Treasuries Exceed 5% For First Time Since 2007

Spring/Autumn Treasury Sell-Off

Earlier this month data from the Treasury department showed that foreign buyers, including the central banks of Japan and China, were net sellers of U.S. bonds in September to the tune of $1.7 billion.

The Bloomberg Agg index suggests investors were net sellers between May and October. Indeed, Oct. 23 saw the yield on the 10-year Treasury peak at a 16-year high of 5.021% — when yields move higher Treasury prices move lower as investors sell.

So, what’s bought buyers back into the market? Even on the day the 10-year yield hit its peak, it ended lower on the day at 4.85%. Some of the bond buying came from hedge fund short sellers, including Bill Ackman’s Pershing Square Capital Management, who were covering their positions.

Then the Federal Reserve, at its Nov. 1 policy meeting, held interest rates steady for the second consecutive meeting, spurring hopes among Treasury and equity investors that its rate-hike cycle was over.

Inflation Rate Drops

Hopes of a more dovish policy stance from future Fed meetings were raised by U.S. inflation data that showed headline consumer prices had dropped to 3.2% in October — creeping down towards the Fed’s 2% target rate.

“It is clear from the sharpness of the move across asset markets in the past week or two, that the CPI inflation release was a pivotal moment in the market's interpretation of the outlook for Fed interest rate policy,” said Jane Foley, senior FX strategist at Rabobank.

The benchmark 10-year yield stood at 4.29% on Wednesday morning, still higher than the 3.7% at which it started the year, but at a level that is now attracting buyers again.

Now Read: Foreign Buyers Desert US Treasury Bond Market As Supply Increases

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