• Bonds marks best month is 4 decades

· Rally fuelled by expectations of US rate cuts next year

November was a month to remember across asset classes, except energy, as bonds recorded their best month in nearly 40 years.

This dramatic event came as the treasury yields dropped from their 16-year high on the back of investors’ rising optimism that the Fed has finally concluded its hiking campaign.

Bond traders reacted immediately, sending the 10Y US treasuries down from their 5% peak in October to 4.2% at the start of December as the Goldilocks scenario gripped the markets on the back of robust macro data.

The Fed’s crusade against the inflation tyrant continued to show major signs of success. Inflation data came softer than expected, as the Fed’s preferred measure, personal consumption index (PCE), continued its descent toward the 2% target that the US central bank vows to bring it.

Fixed-income traders are not the only ones who expect the decline in rates; options traders see a 62% probability of a rate cut as soon as March 2024.

All about Bonds

Bank of America Global Fund Managers survey shows that investors are most bullish on bonds since the Great Financial Crisis of 07-09. This surge in demand for bonds should not even come as a surprise given the recent inflation reads, as long-duration asset returns shine most when rate cut expectations jump.

Long-term bonds are more sensitive to rate changes than short-term ones, as they have more significant price appreciation when rates go down.

US Treasuries are not that oversold anymore, which means that investors should continue to find value in the US government bond market as a positive trend reversal gathers momentum.

The TLT jumped 9% last month as yields went down (Bond prices and yields are inversely related). The long-duration bond ETF cumulative inflows are at an all-time high of $47 billion at the end of November.

That looks to be a major signal that the trade might finally be mean-reverting toward its long-term average of $116.

Source: Koyfin

Investors are betting heavily that the hiking cycle is over, and rate cuts are coming soon.

Even if the long-awaited recession materializes, this will likely trigger the Fed to bring down rates more rapidly and significantly than the market expects.

Lastly, the bond market has not experienced losses for three consecutive years. Historical patterns show that following two consecutive years of losses, the third year typically sees a rebound into positive returns. While 2023 may be an outlier, if historical trends hold, 2024 is poised to be a promising year for bonds.

Inventors can long the TLT (long duration bonds) using our 5x 20+ Year Treasury Bond

Alternatively, they can short the TLT (long duration bonds) using our -5x 20+ Year Treasury Bond