By Sarupya Ganguly
BENGALURU (Reuters) – U.S. Treasury yields will stagnate over the next three months and fall only modestly by the end of the year amid declining expectations of Federal Reserve rate cuts, a Reuters poll of bond strategists shows.
After peaking at 5.02% in October, US 10-year Treasury yields fell more than 120 basis points (bps) as traders priced in as much as 150 basis points of Fed rate cuts this year.
Particularly strong US economic data and inflation still above the Fed’s target have prompted financial markets to limit expectations to just two 25 basis point rate cuts this year, starting in September.
Economists in a separate Reuters survey shared this view, saying there was a significant risk of only one or even no rate cuts in 2024.
That repricing of interest rate futures has caused rates to currently rebound to 4.44%, although the path has been volatile, crossing a range of nearly 40 basis points in the past two weeks.
The US 10-year yield, which was roughly stable at 4.35% at the end of August, is then expected to fall to 4.23% and 4.13% respectively in six and 12 months, according to the average forecasts of 55 fixed income strategists and analysts in the United States. a Reuters poll from June 6 to 11.
“On the yield side, we think yields will be more choppy sideways and then lower towards the end of the year. We are still in the camp of easing inflation pressures and eventual Fed rate cuts – one or two – towards the end of this year.” the year,” said Kathy Jones. , chief fixed income strategist at the Schwab Center for Financial Research.
“But there will be continued volatility as the market reaction to any data release will continue to be amplified and if they don’t meet expectations we will have a big reaction. We have to recognize that the economy has been much more resilient over the past few years than most people expected.”
Robust economic data has also prompted strategists to raise average forecasts for interest-sensitive 2-year Treasury yields. The yield on 2-year government bonds has now fallen by only 22 basis points to 4.62% at the end of August and by around 40 basis points from 4.84 to 4.45% in six months. % currently.
“Most of the soft data – the surveys and so on – has come out weaker than expected so far, leading forecasters to believe that a weakening of the economy is imminent; while the hard data remains strong,” said Jabaz Mathai, head of the G10 rates and FX at Citi, said.
“So the question on people’s minds – when the economy will actually enter a recession – has been extremely difficult to answer, which is why interest rate cuts have been postponed. It’s a mixed environment, so interest rates are likely to remain range-bound for years to come. in the short term,” Mathai added.
Much of the direction of rates in coming months will depend on news from the central bank’s policy-setting meeting on Wednesday, with updated economic projections expected to show fewer rate cuts than expected in March.
When asked what was more likely for the US yield curve in the coming month, 70% of respondents, 14 out of 20, said it would steepen, nine of whom said it would be led by short-term bond yields falling more than that in the long term. , or ‘bull steepening’.
Five said ‘bear flattening’ was more likely, four said ‘bull flattening’, while two opted for ‘bear flattening’.
(Reporting by Sarupya Ganguly; Polling by Pranoy Krishna and Indradip Ghosh; Editing by Jonathan Cable, Ross Finley and Mark Potter)
