Fed caution, inflation risks propel US Treasury yield forecasts higher again
reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/mm-bondyield-polls?s=6J&st=G poll data
Reuters poll graphic on U.S. 10-year Treasury yield forecasts: https://tmsnrt.rs/41xanBU
By Sarupya Ganguly
BENGALURU, Dec 17 -U.S. Treasury yield forecasts from bond strategists have marched higher for a second month amid expectations of limited remaining Federal Reserve rate reductions and rising inflation risks in 2025, a Reuters survey found.
Having kicked off its easing cycle with a jumbo half-percentage point cut in September, the central bank has lowered its fed funds rate USFOMC=ECI by 75 basis points and looks set to trim another 25 bps on Wednesday to 4.25%-4.50%.
Yet, since the first reduction, the benchmark U.S. 10-year Treasury yield US10YT=RR, which moves inversely to prices, has shot up around 70 basis points - hitting a near six-month high of 4.50% last month.
The resilience of the world's largest economy and President-elect Donald Trump's proposed policies from tariffs to tax cuts - all expected to be inflationary - have put a dampener on the Fed's easing plans and pushed yields higher, particularly on longer-dated bonds.
While the benchmark 10-year yield has moderated to around 4.40%, the median forecast from a Dec. 12-17 Reuters poll was for it to fall modestly to 4.25% in a year - above the 4.10% recorded last month and 50 bps higher than an October median.
Around 55% of forecasters raised their twelve-month 10-year note yield forecasts from November.
"If Trump's policies focus on pushing growth up via increasing deficits, rates have even more room to move up," said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
"Over the coming two years, it's very hard to see those deficits coming down materially - which means the government will have to sell a lot of Treasuries to finance spending."
An Oct. 28 estimate from the Committee for a Responsible Federal Budget, a budget-focused think-tank, found Trump's proposed policies could push up U.S. fiscal debt by $7.75 trillion over the next decade.
"Inflation was coming down sharply during the summer, but now that has stopped. The labor market has weakened a bit, but is still strong. Consumer spending is resilient and equities are hitting record highs. Financial conditions may not be as tight as the Fed thinks," Ren added.
"If the Fed keeps cutting in this raging bull market, long-end rates will move even higher."
In line with interest rate futures, economists surveyed by Reuters last week now expect only three more quarter-point rate cuts next year - half the amount predicted earlier this year.
Yet, forecasters remained mostly conservative in their point estimates for higher yields.
Survey medians from 44 strategists showed the benchmark yield slightly below current levels at 4.30% in three months and 4.27% at end-May, but both higher than November.
"Market rates are likely to remain around current levels," said Robert Tipp, chief investment strategist at PGIM Fixed Income. "While the Fed is likely to continue to cut, it definitely won't be the one-cut-per-meeting pace priced in at some points over the last several quarters."
A 75%-strong majority, 15 of 20 strategists, responding to an additional question said the 10-year yield was unlikely to cross 5% next year. The last time it did so was in October 2023.
"One of the scenarios we considered is a 'higher for longer' yield curve, where the 10-year yield could return to 5%. In that case, extending duration, i.e. buying longer-dated bonds, could be detrimental. But it's not our base case," said Hong Cheng, head of fixed income and currency research at Morningstar.
Reuters poll - U.S. 10-year Treasury yield forecasts https://fingfx.thomsonreuters.com/gfx/polling/akveejwznvr/Reuters%20poll%20-%20US%2010-year%20yield%20forecasts.png
Reporting by Sarupya Ganguly; Polling by Pranoy Krishna and Aman Soni; Editing by Jonathan Cable and Christina Fincher
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
