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Rate-cut euphoria puts global bonds on course to erase 2023 loss

(Bloomberg) — Global bonds have been such a kicking post in recent months that it may come as something of a surprise they are just a fraction away from erasing this year’s loss.

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The Bloomberg Global Aggregate Bond Index jumped 1.3% Tuesday, the biggest one-day gain since March, following weaker-than-expected US inflation data. The gauge, which was down by as much as 3.8% for the year less than a month ago amid the higher-for-longer narrative, is now just 0.3% lower for 2023.

The global index, which tracks more than $61 trillion, powered ahead as the US inflation numbers spurred traders to erase bets on any further Federal Reserve interest-rate hikes and to boost wagers on lower borrowing costs. The soft data added to signs the steepest tightening cycle in a generation is set to slow economies worldwide and push central banks toward rate cuts in 2024.

“It doesn’t matter now what the Fed says about holding rates higher for longer, it’s likely to start a gradual easing cycle in the first half of 2024,” said Kellie Wood, deputy head of fixed income at Schroders Plc in Sydney. Schroders is long two-year Treasuries and is also favoring Australian and European rates on a bet that global bond yields have peaked, she said.

Markets are now pricing in more than half a percentage point of rate cuts by July, about double the amount they anticipated at the end of October. The US core consumer price index, which excludes food and energy costs, increased 0.2% in October from September, less than the median forecast of 0.3% in a Bloomberg survey.

US two-year yields slid 20 basis points Tuesday after the data was published, while those in Germany fell nine basis points. Australia’s three-year yields slipped 12 basis points when they opened Wednesday, shrugging off stronger-than-forecast local wage growth numbers.

Some investors remain nervous the market may be getting ahead of itself in betting on Fed easing.

Pendal Group just closed a long position in 10-year Treasuries for a profit after entering it in late October, said Amy Xie Patrick, head of income strategies in Sydney. Fidelity International has also been trimming some of its longer-duration bets, taking off some of its longs on US 30-year bonds.

Investors “should have been already in the trade, especially as yields hit 5%” and above, said George Efstathopoulos, a fund manager at Fidelity International in Singapore. “We’ve been buyers across the curve, especially the long end. Some of the cuts that are being priced in for next year might be a little bit premature.”

Pendal’s Xie Patrick said she’s “happier hiding in two-year” Treasuries again. Schroders is also staying long on two-year notes, while maintaining a “modest short” for 30-year bonds amid concern about widening US fiscal deficits, Wood said.

The global surge in bonds is a reversal after yields jumped to the highest in more than a decade last month on concern economic resilience and a looming flood of supply would overwhelm waning demand. Some of the investors who suffered steep losses earlier in the year are now anticipating their long-held conviction that a global recession is coming will be realized.

“We have reached ‘peak everything’ — as all the factors (fiscal policy, liquidity, China growth, housing, credit, and employment) that have contributed to the global economy’s resilience are showing signs of weakness,” Steven Boothe, a fund manager at T. Rowe Price Group Inc., wrote in a research note. “The historic selloff in bonds in 2022 has created a buying opportunity for investors of all kinds.”

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