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Bond Markets Around the World Are Unwinding the Rally From December's 'Fed Pivot Party'

January 24, 2024
minute read

U.S. stocks continue to hold onto their recent record highs, but globally, bond markets are undergoing a reversal from the rally that drove yields lower and prices higher towards the end of last year.

The yields on key government bonds in Canada, Germany, the U.K., and 30-year Treasurys have completely bounced back from their decline after the December Federal Reserve meeting. At that meeting, Fed Chair Jerome Powell hinted at the possibility of rate cuts in early 2024. Bond yields, which move inversely to prices, have been rising as prices fall, and vice versa.

Market expectations for early rate cuts were challenged by central bankers and economic data. In the U.S., positive data on retail sales, consumer sentiment, and unemployment claims, along with comments from various Fed officials, contradicted the nearly fully priced-in March rate cut before the Martin Luther King Jr. holiday, according to Joseph Kalish, chief global macro strategist at Ned Davis Research.

As a consequence, several markets have completely reversed the rally that followed Powell's pivot party, as stated by Kalish.

For instance, the German 10-year yield stood at 2.32% on Wednesday, compared to 2.23% on Dec. 12. Similarly, the yield on the 10-year gilt, the U.K.'s benchmark sovereign bond, was almost back to its Dec. 12 level of 3.97%, although it had reached 3.93% on Friday and returned to 4% early Wednesday.

The Canadian 10-year yield increased by about nine basis points over the same period.

Meanwhile, the yield on the 30-year Treasury bond was slightly higher as of Wednesday than on Dec. 12, standing at 4.347%. However, Kalish noted that yields are still significantly lower in the short-to-medium portion of the curve.

In the final two months of 2023, global bond yields surged as investors anticipated up to six interest-rate cuts from the Fed in 2024. This was despite the central bank projecting, in its official projections, that policymakers generally expected only three cuts this year.

Some market segments, such as small-cap stocks, have experienced reversals in gains from the "everything rally" period as investors reevaluate the likelihood of the Fed cutting rates as early as March. The Russell 2000, a closely watched small-cap index, was down 2.5% in recent trade at 1,976.

Treasury yields had a significant rally in the last quarter of 2023, with the 10-year yield experiencing its most substantial quarterly decline since March 2020, falling nearly 69 basis points. This late-year rally prevented Treasurys from marking a third consecutive year of losses.

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