Bond Market Sentiment Could Scarcely Be Worse

Treasuries set up for a great contrarian trade in 2025 as investors shun duration

Highlights

• Treasuries set up for a great contrarian trade in 2025 as investors shun duration

• Credit card delinquencies and corporate junk default rates are on the rise (no financial imbalances?)

• Average stock decline of -6% this month throws cold water on calls of “broadening out”

• Falling commodity prices and auto insurance premiums will help bring PCE inflation below target

Key Takeaways

Risk-Off Continues

• Friday’s risk-off trade has been extended into this holiday-shortened week. U.S. equity futures are down and European markets in the aggregate are trading lower by -0.2%. Asia was in the red as well, save for a modest +0.2% advance in China’s Shanghai Composite.

Yields Derail Treasury Returns

• Despite the better tone in bonds in the overnight trade, the surge in yields since the initial jumbo Fed rate cut on September 18^th kyboshed any hope that the Treasury market would deliver positive returns for the year — poised to deliver worse returns than T-bills for the fourth straight year (flat versus +5% for T-bills).