December continued November’s sharp reversal of trends seen in the prior months. The UST10y totalled a 120bp downdraught from the 5% end of October high with the UST long bond index recording its biggest ever 2 month positive return of over 10%. The data generally pushed the soft landing agenda, but the real accelerator was a distinct lack of push-back against the aggressive market pricing of cuts in 2024 from Fed President Powell at their monthly governors meeting. This lack of messaging, combined with an additional cut being guided via a lower dot plot in 2024, provided the green light for a further bond rally, which eventually priced in 175bp of cuts next year. Additionally, the UST 10y yield rallied a further 50bp over December to settle just shy of 3.90% at year end. Other core markets got dragged along in the frenzy as UK and EUR rates markets similarly priced in 6/7 rate cuts in 2024. We hold the view that a significant amount of rates alpha has now been priced and the pressure is on data to justify this through a slowing labour market and further lowering of inflation.
The sole G10 central bank to move rates over the month was Norway’s Norges Bank, who, true to their word and against the grain, raised the deposit rate by 25bp to 4.50% and declared a 20% chance of a further hike at their March meeting. So, we endured a volatile end to what has been a volatile year. This is confusing in some cases as the UST 10y bond almost finished within a basis point of where it started the year. The portfolio, which had weathered the moves of November, relinquished some of the years gains in December to record an overall healthy 2023 result. We believe 2024 will present many macro relative value opportunities to monetise.
The US 10y closed the month 48.7bps lower and 5s-30s swap was 1.1bps steeper.
