(Bloomberg) -- US Treasuries have erased this year’s losses as slowing inflation and signs of a weaker labor market fuel bets on Federal Reserve interest-rate cuts.

The Bloomberg US Treasury Index rose 0.2% on Monday and is now back about where it ended 2022, erasing losses of as much as 3.3% earlier this year. 

Investors had anticipated that 2023 would be the “year of the bond,” but were instead hit by waves of turmoil as a resilient US economy prompted the Fed to extend its steepest tightening cycle for a generation. The losses pared as inflation eased, with traders positioning for rate cuts starting in the first half of 2024.

“Growth momentum has peaked, inflation momentum has peaked and central bank tightening cycles are done,” said Andrew Ticehurst, a rates strategist at Nomura Inc in Sydney. “Yields are still much higher than they were, and there is room for rates to rally on risk-off developments.”

Even a flat year might be a welcome respite for bond investors, after Treasuries lost a record 12.5% in 2022, following a 2.3% hit the year before. A strategy of merely holding Treasury bills has earned 4.5% this year.

The $26 trillion market for Treasuries gyrated this year in a way normally more associated with riskier assets like equities. Implied volatility for the Treasuries market soared in March to the highest since the 2008 financial crisis, according to ICE’s MOVE Index.

After starting the year strong, Treasuries erased gains as resilient US jobs and inflation data boosted expectations for Fed hikes. The banking crisis in March then kicked off a strong rally that took the index year-to-date return to a peak of 4.2% by April, which was followed by a six-month losing streak — the longest since 2011. 

The losses eased in November as traders pared bets on further Fed tightening, with the Bloomberg gauge of Treasuries climbing 2.8% this month — the most since March. At the end of October, Fed funds futures implied a 40% chance of another hike. Now, they’ve priced out increases and anticipate a rate cut by mid-2024.

While the yield on benchmark 10-year Treasuries is still up this year, it has fallen about 60 basis points since reaching a peak above 5% in October. 

“We expect significant cuts in interest rates from the leading central banks in 2024,” Steven Bell, chief economist for EMEA at Columbia Threadneedle wrote in a note. “The war against inflation is not yet won but the tide has turned. If I’m right that will be good news for bonds and equities alike.” 

--With assistance from Alice Gledhill and Aline Oyamada.

(Updates with 10-year yield move, economist comment in final two paragraphs.)

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