On Wednesday, yields on U.S. 30-year Treasury bonds dropped below 4%, reaching their lowest point since late July. This decrease in long-term Treasury yields has led to a significant increase in fixed income and real estate assets, as market participants increasingly predict rate cuts by the Federal Reserve in the coming year.
Market analysts are now pricing in a substantial reduction of 164 basis points in interest rates by December 2024. The first rate cut, which was widely anticipated to take place in March 2024, is now considered almost certain, with Fed futures indicating a 90% probability of this scenario.
The iShares 20+ Year Treasury Bond ETF (TLT), the largest bond exchange-traded fund (ETF) in the world, has seen a surge of 21% since late October, entering a bull market. This increase is a result of the inverse relationship between bond prices and yields, and investor enthusiasm for fixed income investments. The TLT ETF has attracted over $8 billion in net inflows in just three months, highlighting its growing appeal.
A significant technical development for long-dated Treasury bonds is their rise above the 200-day moving average, which has not happened since March 2023. This is seen as a potential bullish trend reversal by technical chartists.
These trends have also had an impact on the housing mortgage market, as inflation eases and the Fed signals rate cuts. Mortgage rates have been steadily declining, with the average rate for a 30-year fixed mortgage dropping to 6.67% as of December 21st. This offers relief to homebuyers and is the lowest rate since June.
The Real Estate Select Sector SPDR Fund (XLRE) has emerged as the best-performing sector over the past three months, benefiting from the anticipated decline in interest rates and Treasury yields. The real estate sector, as represented by this fund, has increased by 19% during this period, highlighting its strong sensitivity to changes in interest rates.