Due to traders preparing for the return of Trump and the possibility of the Fed slowing down its rate cuts, the US bond market's nearly two-month downturn has almost erased this year's gains.

The Bloomberg U.S. treasury notes yield index shows that its increase for 2024 shrank from a peak of 4.6% on September 17 (the day before the Federal Reserve lowered borrowing costs for the first time since 2020) to about 0.7%.

This marks a disappointing decline in the world's largest bonds market, where signs of U.S. economic recovery and expectations that Trump's victory will bring faster inflation (given his campaign promises to raise tariffs and lower taxes) have severely impacted the bonds market.

Ed Al-Hussainy, a strategist at Columbia Threadneedle in New York, stated: "The U.S. treasury market is struggling to find$Polaris (PII.US)$. There are too many variables."

Investors originally expected that the Federal Reserve's easing policies would bring unexpected gains. However, this has not been the case; since September 18, the u.s. 10-year treasury notes yield has surged by nearly three-quarters, marking the largest increase in the first two months of a rate-cutting cycle since 1989.

Buyers are emerging.

Last Friday, a large number of buyers entered the market because $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ it rose to 4.5% for the first time since May, indicating that some investors are hopeful for a positive annual return in 2024.

Other traders may be reluctant to conclude that the market downturn has ended, as doubts about how much further the federal reserve can cut rates are growing. Fed Chairman Powell stated last week that the federal reserve is not 'urgent' to cut rates, so the probability of a rate cut at next month's decision is now viewed as having almost only a 50% chance.

All of this may leave the market in a state of uncertainty until the next round of key data is released, first the inflation index favored by the federal reserve at the end of the month, which is the first report in a series that may determine what actions the federal reserve officials take in December.

Last Friday, the retail sales report showed strong performance, and the u.s. 10-year treasury notes yield reached a peak. The Bloomberg economic surprise index surged to its highest level since February, indicating that economic data exceeded expectations.

Traders currently expect the federal reserve to cut rates by a total of about 75 basis points over the next 12 months, about half of the cut amount in September.

JPMorgan strategist Jay Barry wrote in a report last week that after the sell-off in recent months, the u.s. 10-year treasury notes yield "appears cheap," but valuations are still not sufficient to provide a buying opportunity. They "prefer to patiently wait for recent trends to dissipate."

For bond investors, this is another setback in a year filled with false hopes. From late April to mid-September, the return on u.s. treasury bonds exceeded 8%, sparking a brief fantasy of a strong performance in 2024.

Investors are better off putting money into u.s. treasury bonds equivalent to cash, which has yielded about 4.6% year-to-date in 2024. The return on u.s. government bonds will lag behind cash for the fourth consecutive year, marking the longest period since Bloomberg data began in 1991.

For Mark Dowding, chief investment officer of RBC BlueBay Asset Management, the downtrend in long-term bonds has not yet ended. He bets that the yield on 30-year bonds will rise toward 5%, the highest level since November 2023, as he expects the Trump administration could expand the budget deficit through tax cuts. Currently, that bond yield is about 4.6%.

He stated, "The risks related to fiscal and debt issuance mean that investors will demand a higher risk premium."

Editor/Rocky