The challenges ahead of a bond bull market The challenges ahead of a bond bull market The challenges ahead of a bond bull market

The challenges ahead of a bond bull market

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Markets must deal with the disconnect concerning next year's inflation and Federal Reserve rate cut expectations. If the U.S. economic activity and labor demand don't decelerate abruptly, Treasuries are at risk of reversing their November gains as the central bank remains on hold. A test is already coming this week with jobs figures. If the unemployment rate remains stable, it can give ammunition for markets to push back on next year’s expected rate cuts. Yet, next week's 3-, 10-, and 30-year note auctions and a new set of Dot Plot will give a better picture of duration demand and policymakers' intentions.

Expectations for interest rate cuts might be ahead of themselves. Markets are pricing for five rate cuts next year starting in May, estimating that the Fed Fund rate will drop to 4.25% by January 2025.

Consequently, during the past few weeks, yields dropped across maturities, easing financial conditions when inflation remains well above the Fed's target and job data remains resilient. Easing financial conditions set the ground for the market to envision a soft landing, providing fertile soils to a bull stock market.

However, there is none so deaf as those who will not hear. Indeed, investors rejected Jerome Powell's attempt to push back on such expectations last Friday. Not only did Powell say that interest rate cuts are not on the horizon, but he warned that the central bank might tighten even further. With financing conditions easing abruptly, the chances for a final rate hike rise.

Even if macro data show lower inflation and higher growth risks, markets will find it challenging to justify expectations for such aggressive rate cuts going forward.

According to September’s FOMC economic projections, the Federal Reserve expects to cut rates only twice next year, with core PCE inflation ending the year at 2.6%, unemployment at 4.1%, and real GDP at 1.5%. In contrast, markets expect the Federal Reserve to cut rates five times, despite economists expecting core PCE to end the year well above target at 2.7%. The disconnect between the expected monetary policy path and inflation expectations is striking, and it's likely to be challenged as the Federal Reserve doesn't move from its hawkish stance.

This week’s jobs data are going to be an important focus. Consensus expects a +180k nonfarm payrolls, an unchanged unemployment rate, and stable average earnings. Yet, the unemployment rate might trump all the other readings, as the latest figure came at 3.9%, just 30bps higher than when the Fed began to hike interest rates in March last year. A higher-than-expected unemployment rate might be a signal that the labor market is cooling faster, fostering speculation that monetary policies need to be easier.

However, the real test will come next week, with the U.S. Treasury selling 3- and 10-year notes on Monday and 30-year bonds on Tuesday ahead of the FOMC. These auctions will be vital in understanding whether investors are buying Treasuries at current levels and extending duration ahead of the FOMC meeting. Then, the attention will turn to the Federal Reserve's new set of dot plots and economic forecasts.

Fiscal woes will return in the first quarter of 2024

Investors should carefully consider duration risk in light of the upcoming Quarterly Refunding Announcement (QRA) in January, which will likely show more coupon issuance going forward.

The average coupon the Treasury pays on government bonds has risen to 2.5%, the highest since 2012. That means the U.S. Treasury will need to raise approximately $768 billion a year in new debt to service outstanding and rolling debt, even if there is no further increase in fiscal spending. That represents an increase in the overall Treasury’s debt issuance of 4.5% per year.

The Treasury Borrowing Advisory Committee (TBAC) recommends that the U.S. Treasury increase coupon issuance by $50 billion across maturities during the first quarter of 2024. The tenors to be increased the most are the 2-, 5-, and 10-year, whose selling size is recommended to rise by $9bn each per quarter ($3bn per auction). In a nutshell, from the issuance of $35 billion 10-year notes in the first 10-year reopening in September 2023, we are passing to a first reopening of $38 billion in December 2023 and $41 billion in the first 10-year reopening in March 2024. Although the Treasury is not bound to TBAC suggestions, they are normally followed, providing a good picture of forward issuance.

By limiting our analysis to the 10-year sovereign, it's easy to appreciate that the Treasury bond issuance is expected to increase beyond what markets have been used during the COVID-19 emergency.

Will the market be able to absorb higher U.S. Treasury supply?

That depends on:

  1. Path of monetary policies. According to current bond future pricing, the Federal Reserve will not cut rates until May 2024. At the same time, economic activity and labor demand are unlikely to decelerate abruptly, giving no space to the Federal Reserve to reverse Quantitative Tightening (Q.T.) or step down from its hawkish stance. That will likely deter duration bids in the first part of the year before a bond bull market forms. That means that upcoming U.S. Treasury auctions will become more important and can be market-moving.
  2. Foreign investors demand. The Bank of Japan is testing the waters on exiting yield curve control. The yield of JGBs has tripled in just one year, and as yields continue to rise, Japanese investors will have fewer reasons to invest abroad. That poses a risk for both U.S. and European sovereigns.

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.