Once, a decades-long bull market gave U.S. Treasury investors confidence in returns, but now, this confidence is facing significant challenges. The U.S. Treasury market has been sluggish for the fourth consecutive year, with returns continuing to underperform short-term Treasury bills. Optimistic forecasts from Wall Street investors have repeatedly fallen short, and market sentiment is becoming increasingly cautious.
Rising U.S. Treasury Yields Intensify Investor Sell-Offs
As of December 26, the ICE BofA U.S. Treasury Index has registered a mere 0.4% return this year, compared to a 5.2% return on short-term Treasury bills. The plummeting prices of long-term treasuries have pushed the benchmark 10-year U.S. Treasury yield up to 4.619%, a sharp rise from 4.192% at the end of November and 3.860% at the end of 2023.
Meanwhile, frequent sell-offs by investors, with fund managers continuously withdrawing from long-term bond funds, have further driven up long-term U.S. Treasury yields, suppressing market performance. Since Treasury yields serve as an important "anchor" for pricing various borrowing costs, their rise has pushed 30-year mortgage rates up to around 7%, keeping the housing market sluggish.
Diverging Investor Expectations Heighten Market Uncertainty
In recent years, Wall Street investors have repeatedly misjudged the Federal Reserve's policies and bond market returns. When the Fed significantly raised rates in 2022, most investors viewed it as a short-term phenomenon. However, as inflation pressures persisted in 2023, investors began betting that the Fed's rate cuts would slow down.
Currently, the market expects the Federal Reserve to cut rates only once or not at all in 2024, a shift that has notably impacted the bond market. Meanwhile, institutions like Goldman Sachs remain relatively optimistic, forecasting that inflation will ease next year, potentially allowing the Fed to cut rates three times, which may lead the 10-year Treasury to outperform short-term Treasury bills.
Bond Market Pressure Spills Over, Risk Assets Under Strain
The poor performance of the bond market has created a squeeze effect on risk assets. Historical data shows that U.S. stock valuations are already at high levels, and compared to the risk-free returns of 10-year Treasuries, their performance over the next decade may struggle to surpass bonds. Data compiled by economist Robert Shiller suggests that this scenario indicates a decline in the investment appeal of stocks, further confounding investors.
Looking Ahead: Can the Bond Market Rebound?
Despite the many pressures facing the U.S. Treasury market, some institutions remain cautiously optimistic about its prospects. Goldman Sachs predicts that the strong growth of the U.S. economy and the federal budget deficit have been fully priced into the market, and a drop in inflation next year might offer an opportunity for a bond market recovery.
However, with persistent inflation threats and policy uncertainties, bond investors may need to be more cautious, potentially opting for short-term Treasury bills as a safe haven in the near term. Whether the U.S. Treasury market can emerge from its slump will depend on further interplay between policies and market forces.
