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Will 2023 Be Another Down Year For The US Treasury?

The Treasury market is poised to post its third consecutive year of losses, a feat that has not occurred in “several generations.”  Bloomberg writes Treasuries maturing in 10 or more years have slumped about 5% this year following a record 29% plunge in 2022.

Yesterday the US Treasury 1.25% 2050 traded as low as 49 29/32.  The bond was issued in 2020 around 98.  In most cases, a bond trading at fifty cents on the dollar often signals the seller of the debt is in such financial distress that it could default.

Obviously, this is not the case but is instead representative of the carnage that has occurred in Treasuries as interest rates have increased, often regarded as one of the safest and most conservative investments.

2023 was forecasted to be “The Year of the Treasury” but such has not materialized given strong growth and stubborn inflationary pressures.

The Fed is the largest investor in Treasuries, holding about 19%, a legacy of its bond purchasing program, aka quantitative easing.  Other buy and hold investors such ETFs, pensions, insurance companies and other central banks also dominate.

Will 2024 be different?  At the time of this writing, according to market sentiment indicators, the overnight rate is expected to be 100 bps lower by the year end 2024.  Currently the overnight rate is around 5.33%, with the market suggesting 2024 year end rate around 4.49%. 

Several weeks ago, sentiment indicators were suggesting the overnight rate would be 150 bps lower by the year end 2024.

The Federal Reserve has indicated all monetary policy decisions will be data centric.

Oil is continuing its unrelenting advance given a lack of options to lower prices. Further drawdowns from the strategic oil reserve are not an option given that stores are about 50% lower than two years ago, hoovering around levels last experienced in 1983.

Increased drilling is legislatively prohibited.

OPEC et.al will not or perhaps more disturbingly, cannot increase production.

Green energy is not delivering the output as projected with actual output only 15% to 25% of anticipated levels.

Surging crude prices and rising labor costs, perhaps illustrated by the UAW strike, amplified by the unsatiable demand for monies by the Federal government and Quantitative tightening (QT) rises the odds that 2024 may be an unprecedented fourth consecutive year of declining Treasury prices.

Today is the commencement of the two-day FOMC meeting.  For several years, markets were myopically focused on the “dot plot” or the median projection of each FOMC member.  As with yesterday’s “Central Tendency” projections, the dot plot is losing importance given the significant difference between forecasted and actual outcomes.

Markets were relatively quiet yesterday as the focus is myopically centered on the Fed meeting.

Last night the foreign markets were mixed.  London was up 0.23%, Paris up 0.30% and Frankfurt down 0.02%.  China was down 0.03%, Japan down 0.87% and Hang Seng up 0.37%.

Futures are flat.  The 10-year is off 2/32 to yield 4.32%.  Oil sin continuing its advance, up about 1.5% to over $92.65/barrel.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.