The risk of the Fed not cutting interest rates in December intensifies, and US bonds erase their gains for 2024.

Due to traders preparing for Trump's return and the possibility of the Federal Reserve slowing its rate cuts, the US Treasury market's two-month slump has almost erased this year's gains. The Bloomberg US Treasury Return Index shows that its 2024 return has shrunk from a peak of 4.6% on September 17 (the day before the Fed's first rate cut since 2020) to around 0.7%. This marks a disappointing consecutive decline in the world's largest bond market, with signs of US economic recovery and expectations of faster inflation from a Trump victory (given his promises during the campaign to increase tariffs and reduce taxes) inflicting heavy losses on the bond market. Ed Al-Hussainy, a strategist at Columbia Threadneedle Investments in New York, said, "The US Treasury market is struggling to find its north star. There are too many variables." Investors had expected the Fed's accommodative policy to bring unexpected profits. However, since September 18, the 10-year Treasury yield has soared nearly three-quarters, marking the largest increase in the first two months of a rate-cut cycle since 1989. Buyers Emerged Last Friday, a large number of buyers entered the market as the 10-year Treasury yield rose to 4.5% for the first time since May, indicating that some investors are hopeful of achieving positive annual returns in 2024. Other traders may be hesitant to conclude that the market downturn has ended, as doubts about how much further the Fed can cut rates continue to grow. Fed Chair Powell said last week that the Fed is not "eager" to cut rates, so the rate decision next month is now seen as having almost a 50% chance of a cut. All of this may leave the market in an uncertain state until the next key data is released, starting with the inflation index favored by the Fed at the end of the month, which is the first in a series of reports that could determine what action Fed officials take in December. Last Friday, retail sales reports were strong, pushing the 10-year Treasury yield to its highest point. The Bloomberg Economic Surprise Index jumped to its highest level since February, indicating economic data exceeding expectations. Traders currently expect the Fed to cut rates by a total of about 75 basis points over the next 12 months, roughly half the rate cut seen in September. Jay Barry, a strategist at JPMorgan, wrote in a report last week that after months of selling, the 10-year Treasury bond "seems cheap," but valuations are still insufficient to provide a buying opportunity. They "prefer to wait for recent trends to fade away patiently." For bond investors, this is another setback in a year full of false hopes. From late April to mid-September, the US Treasury market's return exceeded 8%, sparking brief fantasies of stable performance in 2024. Investors are better off parking their money in cash-like US bonds, which have a return of around 4.6% year-to-date in 2024. The return on US government bonds will lag behind cash for the fourth consecutive year, the longest period since Bloomberg data began in 1991. Mark Dowding, chief investment officer at RBC BlueBay Asset Management, believes the downward trend of long-term bonds has not ended. He is betting that the 30-year bond yield will rise to 5%, the highest level since November 2023, as he expects the Trump administration to potentially expand the budget deficit through tax cuts. Currently, the bond yield is around 4.6%. He said, "Risks in terms of fiscal and debt issuance mean that investors will demand a higher premium for risk."