Graphic: U.S. Treasuries still offer opportunity

Back to black: U.S. Treasury returns staged a rebound across the maturity spectrum last year. The Bloomberg U.S. Treasury 1-3 year index returned 4.3% while the 20+ year index had a 2.7% gain. However, with longer-term yields increasing to start the year, 2024 has seen negative returns, except for the 1-3 year index, which was flat. The 10-year yield was 4.18% as of Jan. 24, up 30 basis points.

Falling inflation: The Personal Consumption Expenditures Price index excluding food and energy, the Federal Reserve's preferred inflation measure, has been dropping. The core PCE price index increased by 2.9% vs. a year ago in December, and 4.1% for the year. That’s down from 5.2% in 2022. Based on the Fed's latest median estimates released following its December meeting, the central bank expects inflation to continue moderating and reach its 2% goal in 2026.

Persistent deficits: The budget deficit as a percentage of gross domestic product was 6.2% in the government's latest fiscal year. That's higher than 2022's 5.2% and the 2.7% average since 1974. Should this persist, some economists believe this will force U.S. Treasury yields higher, although when this will occur remains uncertain.

Treasury holders: Pension funds owned $3.7 trillion of U.S. Treasury securities as of Sept. 30. That's 14% of the total outstanding. The Federal Reserve owned 17%, but its holdings have been falling. It held less than $4.04 trillion of U.S. Treasury notes and bonds as of Jan. 24, down from $4.9 trillion at the end of 2021.