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U.S. bonds could be poised for big gains next year if yields in the $25.7 trillion U.S. Treasury market continue to slip, according to Nuveen Chief Investment Officer Saira Malik.
Malik said she sees a reprieve from a brutal three-year stretch for the U.S. bond market if recent declines in yields continue to carry over into next year.
Her team estimated that 1-year Treasury bills
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could return about 5.2% in a year (see chart), even if there isn’t any change in bond yields from current levels. But the potential for bond gains could shoot up to 12.3% and 21.8% for 10-year
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and 30-year Treasurys,
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respectively, if yields retreat by another 100 basis points in the next 12 months.
Treasury returns could jump to about 12% to 22% for longer-duration bonds if yields drop another 100 basis points in a year.
Nuveen, Bloomberg
If bond yields increase another 100 basis points, however, returns would be negative for a historic fourth year.
The Federal Reserve’s sharp interest-rate hikes since last year have been brutal on longer bonds, putting the Bloomberg US Treasury (20+ year) index on pace for a negative 3-year return of 40.4% as of Monday, according to FactSet.
The popular iShares 20+ Year Treasury Bond ETF
TLT
exchange-traded fund that tracks similar bonds was down 12.6% on the year through Monday, according to FactSet.
Bond prices fall when yields increase, but the opposite takes hold if yields retreat. The failures of Silicon Valley Bank and Signature Bank in March put a spotlight on the painful consequences of owning long, low-coupon bonds when rates suddenly spike if forced sales are triggered.
Many investors have opted to keep their exposure short, however, in Treasury bills that mature in a year or less.
Read: ‘T-bill and chill’ trade sees big influx from individual investors
The 10-year Treasury yield was pegged around 4.62% on Monday, up about 10 basis points. As of Friday, the yield was down about 43 basis points from its 1-year high of 4.987% on Oct. 19, according to Dow Jones Market Data.
Market Extra: ‘Bond math’ shows traders bold enough to bet on Treasurys could reap dazzling returns with little risk
Meanwhile, the Nuveen team said it has been finding opportunities in securitized assets, preferred securities, investment-grade corporate bonds and senior loans, which offer a spread above risk-free rates, including Treasurys.
Stocks
SPX
DJIA
were on pace for modest gains on Monday after posting their best week of 2023 after the October jobs market showed signs of a cooling labor market and potentially signaling weakness in the U.S. economy, spurring hopes of potential Fed rate cuts next year.
See: The Dow ripped higher last week. Why doubters ‘don’t believe in this rebound.’
