US bonds surge toward their best month since 1985, putting them in positive territory for the year

• An index tracking total returns on US bonds has risen 4.3% so far in November.
• That puts US fixed income on pace for their biggest monthly gain since 1985.
• The surge has pulled bonds into positive territory for the year after a steep sell-off.

US fixed income is set to notch its best monthly performance in almost 40 years as markets anticipate a shift in central bank policy.

The Bloomberg US Aggregate Bond Index, which tracks total returns, has surged 4.3% so far in November, on pace for the biggest monthly gain since 1985, according to the Financial Times.

The jump has also pulled the index, which consists mostly of US Treasury bonds, into the positive territory for the year after a steep sell-off. 

It's a turnabout from just a month prior, when both government and corporate fixed-income was suffering extensive outflows. Yields on long-dated Treasurys hit 16-year highs, temporarily breaching 5% levels.

But Treasurys have since erased losses for the year after a historic crash, with the yield on 10-year bonds back under 4.3%. 

Meanwhile, November also encountered renewed interest in riskier bonds, with corporate assets achieving their biggest inflows since July 2020. Junk bonds especially benefited, reversing a slump in the high-yielding investments.

Investors' sudden fixed-income appetite comes on the expectation that the Federal Reserve has reached the end of its hiking cycle. Now, markets are even pricing in a possible interest rate cut as soon as March.

Though this bet was first triggered by October's lower-than-anticipated inflation report, recent commentary from central bank officials has bolstered investors' confidence.

That includes remarks from Fed Governor Christopher Waller, who said Tuesday that policy appeared well positioned to bring inflation back to the 2% target.  

Bets that other central banks are also close to pivoting have spread the bond rally to markets outside of the US. A global Bloomberg index shows that returns on international debt in November have reached 4.9%, making it the best month since 2008.

But markets may be pricing rate cuts too early, some have cautioned. In fact, S&P Global Ratings recently noted that the slump in Treasury yields could actually prompt another Fed rate hike next month, given that rallying bonds are less of a constraint on financial conditions.