Global bonds set to post biggest two-month gain on record

Singapore – The world’s debt market is on track to post its biggest two-month gain on record as traders ramp up expectations that central banks everywhere will slash interest rates in 2024.

The Bloomberg Global Aggregate Total Return Index has risen nearly 10 per cent over November and December, its best run in Bloomberg data going back to 1990. Jitters around recession risks are percolating across markets, underscoring the case to own bonds, as traders bet policymakers may have to aggressively cut interest rates in 2024 to bolster growth.

“What we are seeing now is a bond carnival,” said Mr Hideo Shimomura, a senior portfolio manager at Fivestar Asset Management in Tokyo. “Bond investors have been hibernating, and now I feel that their explosive desire is to come out of their lair.”

Swaps traders are pricing about 150 basis points of rate cuts in the United States and Britain in 2024, and about 175 basis points in the euro zone as investor confidence builds that central banks have won their battle against inflation after embarking on the most aggressive rate-hiking cycles in decades. Such prospects helped draw strong demand for two- and five-year Treasuries at auctions this week.

Falling yields also drove the greenback lower, in turn boosting returns on foreign currency debt, as the Bloomberg index measures performance on a dollar basis.

Yields on 10-year US Treasuries, a global borrowing benchmark, have tumbled around 120 basis points from their October peak to around 3.81 per cent in Asia trading on Dec 28.

US mortgage-backed securities (MBS), Treasuries as well as French and German government bonds were the biggest contributors to the index’s gain over November and December, Bloomberg data showed.

MBS’ strong showing since mid-October defies a textbook theory that they typically underperform other types of bonds when yields are falling.

That is because the securities had been undervalued as their yield spreads widened over Treasuries, said Fivestar’s Mr Shimomura.

“Many investors had been waiting for the time to buy MBS and they rushed to buy them” when the bond market turned, he said.

Investment-grade corporate bonds globally have also rallied, returning almost 11 per cent since the start of November, and are set for the best two-month gain on record, based on a Bloomberg index with data going back to 2001. A tightening in spreads has helped credit outperform government debt over that time span.

“The ferocity of the bond market rally has really augmented the total returns for investors,” said Mr Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

“There’s a feeling markets are signalling we’re heading half-way towards easy monetary policy again.” BLOOMBERG