Bond Strategists Raise US Treasury Yield Forecasts Amid Sticky Inflation

The article discusses the rising US Treasury yield forecasts, driven by persistent inflation and reduced expectations of Federal Reserve rate cuts in 2024, with the benchmark 10-year Treasury yield expected to reach 4.40% by the end of July. The development has significant implications for the economy, influencing borrowing costs, consumer spending, and business investment decisions, with Federal Reserve Chair Jerome Powell citing stubborn inflation as a reason to keep interest rates high. This description focuses on the primary topic of rising Treasury yield forecasts, the main entity of the Federal Reserve, and the context of persistent inflation and interest rate decisions. It also highlights the significant actions and implications of the development on the economy, providing objective and relevant details for AI-generated visual representation.

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Bond Strategists Raise US Treasury Yield Forecasts Amid Sticky Inflation

Bond Strategists Raise US Treasury Yield Forecasts Amid Sticky Inflation

Bond strategists have raised their US Treasury yield forecasts to the highest since November 2023, citing persistent inflation and reduced expectations of Federal Reserve rate cuts in 2024. The benchmark 10-year Treasury yield is expected to reach 4.40% by the end of July and 4.25% in six months, according to a Reuters poll of 27 fixed income strategists.

Why this matters: This development has significant implications for the overall economy, as higher Treasury yields can impact borrowing costs and influence consumer spending and business investment decisions. Additionally, the Federal Reserve's decision to keep interest rates high may delay economic growth and affect the job market.

The yield has surged roughly 70 basis points from a recent low of 3.78% in late December to 4.48% currently, driven by stubborn inflation and strong US economic data. Markets have dramatically delayed rate cut bets, slashing 2024 rate cut pricing to roughly 50 basis points, down from nearly 150 basis points previously. Interest rate futures traders now see almost no chance of a Fed rate hike by year-end and expect the first cut in September, half a year later than previously anticipated.

Mark Cabana, head of US rates strategy at Bank of America, noted, "In order for the 10-year yield to test cycle-highs, you would need to see expectations for a rate hike to come back on the table, and to a much larger extent than they are today." Brian Rehling, head of global fixed income strategy at the Wells Fargo Investment Institute, added, "We look for Treasury yields to decline only slightly by the end of the year simply because we expect to see a bit of a soft patch in the economy - not a recession or anything - just some weakening, giving the Fed enough room to get a cut or two in."

Federal Reserve Chair Jerome H. Powell stated that the central bank is poised to leave interest rates on hold due to surprisingly stubborn inflation. Fed officials had initially expected to make interest rate cuts in 2024, but recent inflation readings have changed their plans. The Consumer Price Index (CPI) inflation measure has remained stuck above 3% this year, while the Fed's preferred measure, the Personal Consumption Expenditures (PCE) index, remains above the 2% inflation goal.

Powell remarked, "We did not expect this to be a smooth road, but these were higher than I think anybody expected. What that has told us is that we will need to be patient and let restrictive policy do its work." The Federal Reserve had lifted borrowing costs sharply to a more than two-decade high of 5.3% between 2022 and mid-2023. Powell expects continued growth and a strong labor market in the months ahead, and believes inflation will begin to slow again.

Wholesale inflation data came in stronger than expected, with April's producer price index (PPI) rising 0.5%, exceeding economists' expectations of a 0.3% increase. The PPI reading is the first of two key inflation reports this week, with the consumer price index (CPI) for April due on Wednesday. Economists expect the CPI to show a 3.4% increase in prices from a year ago and a 0.4% rise on a monthly basis.

Economists forecast the April Consumer Price Index report to show inflation remaining above the Federal Reserve's target, largely due to higher gas prices and elevated upward pressure on prices from the services sector. Core CPI, which excludes highly volatile food and energy prices, is predicted to decline to 0.3% from 0.4% in March. The Federal Reserve is expected to keep interest rates high until late 2024 unless inflation sees renewed improvement.

Economists at Bank of America wrote that the slow progress against inflation and the still-robust jobs market reflect how Fed rate hikes have been slow to filter through to the economy. Andrew Szczurowski, co-head of the mortgage and securitized investment team at Morgan Stanley, notes that the United States avoiding a recession while inflation falls slower than expected are two sides of the same coin, due to consumers and businesses locking in lower fixed-rate debt.

The current federal funds rate target is 5.25-5.50, which has been in place since July 2023. Bond futures traders see a 33.3% chance of one quarter-point cut in the federal funds rate by year-end and a 36.7% chance of two quarter-point cuts by the end of 2024. Powell's confidence in slowing inflation is not as high as before, given the recent data.

Key Takeaways

  • Bond strategists raise US Treasury yield forecasts to 4.40% by July and 4.25% in six months.
  • Higher Treasury yields may impact borrowing costs, consumer spending, and business investment decisions.
  • Fed rate cut bets delayed, with first cut expected in September, half a year later than previously anticipated.
  • Federal Reserve Chair Jerome Powell expects inflation to slow, but remains patient with restrictive policy.
  • Economists forecast April CPI to show 3.4% increase in prices from a year ago, above Fed's 2% target.