US Treasuries Set for Best New Year Start in Two Decades, According to Bloomberg

US Treasuries are off to their strongest start in over two decades as investors purchase government debt, anticipating that the Federal Reserve will slow its rate hikes due to cooling inflation.

The benchmark 10-year yield has declined by as much as 14 basis points, settling at 3.73%. This drop is notable, only surpassed by a 20 basis-point decrease on the first trading day of 2001. Meanwhile, the German 10-year yield decreased by 8 basis points to 2.36%, following regional inflation data that showed a slowdown for the second consecutive month, indicating easing price pressures. Overall inflation in Germany also fell in December, surpassing expectations.

Falling oil prices have further bolstered positive sentiment in the Treasury market, which experienced its largest annual loss in 2022 amid rising inflation that prompted aggressive interventions from the Fed. Although yields ended the year lower than their peak, bond bears dominated trading during the last two weeks of December, especially in Europe.

Ian Lyngen, head of US rate strategy at BMO Capital Markets, described the final two weeks of 2022 as a bearish phase for US rates, occurring during a historically volatile period. However, he expressed optimism that a more rational approach would prevail as investors return from the holiday break.

Currently, money markets are pricing in 61 basis points of Fed rate increases by May, a slight decrease of 2 basis points from the previous week. The European Central Bank is expected to raise its deposit rate to 3.51% by July, which is 4 basis points lower compared to earlier forecasts. The Fed has projected a peak range for its policy rate between 5% and 5.25%, according to the median estimate from policymakers released in December.

Treasuries managed to maintain their gains despite a surge in companies issuing dollar-denominated debt following a two-week pause for the holidays. Nine offerings were confirmed before 9 a.m. New York time, with several more anticipated. Dealers predict that the total for the week could reach between $35 billion and $40 billion.

Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities, remarked that the corporate calendar is typically busy in January, but the volume of offerings on the first trading day of the year is particularly significant and indicative of current market conditions.

This recent movement marks a continuation of the recovery in Treasuries, which gained momentum in November as inflation pressures moderated and central bank officials signaled a less aggressive approach to tightening.

UK bonds also participated in the rally, with 10-year yields initially falling 12 basis points to 3.55% before reducing gains. Predictions for the peak Bank of England rate were adjusted down by 4 basis points to 4.7%.