By Sarupya Ganguly
BENGALURU (Reuters) – Bond strategists upgraded their U.S. Treasury yield forecasts for coming months as sticky inflation and resilient economic activity have pushed financial markets to temper expectations for Federal Reserve rate cuts this year, a Reuters poll showed.
The benchmark U.S. 10-year yield, which moves inversely to bond prices, has surged nearly 60 basis points since the start of the year to 4.46% on Monday, its highest since November, even as U.S. stocks have hit all-time highs and the dollar has gained against most major currencies.
That was driven by traders dialing back Fed rate cut bets for 2024 to around 60 basis points, the lowest since October, down from 150 bps expected in January.
Interest rate futures are now on a knife’s-edge on the timing of the first Fed rate cut between June and July, compared to a 57% chance for June a week ago, after strong jobs market data published last week.
The April 4-9 Reuters poll of 81 bond strategists showed the 10-year yield is expected to fall about 24 bps from 4.39% on Tuesday to 4.15% by end-June and then to 4.00% in six months, wiping out most of its year-to-date rise.
But forecasts were the highest so far this year. A strong 86% majority of those who answered an additional question, 25 of 29, also said the greater risk to their three-month forecast was for the benchmark bond yield to be higher than they predicted.
“Markets are too confident in (a)…stream of rate cuts that will take the funds rate below 4% despite the Fed continuing to push back their time frame,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
“But I think what investors have been experiencing since we moved into this higher interest rate environment – topping 4% on the 10-year – is one where we’re likely to stay for some time. Investors are piling into the market to capture the higher yield and they’re likely to continue to do that.”
A combination of strong economic data and limited progress on inflation in the last couple of months has amplified calls among Fed officials for patience as they approach a decision on when to cut rates.
However, most market watchers remain confident a series of cuts is coming.
The 10-year yield was forecast to fall to 3.85% in a year, slightly lower than the 3.90% median of the primary dealer banks who deal directly with the Fed participating in the poll.
“We see economic growth as healthy but rebalancing, and that will take off some of the inflation pressure, particularly in housing and rents. We see the Fed probably cutting rates twice this year, so there’s still some room for yields to fall,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.
The interest-rate sensitive 2-year Treasury note yield, currently around 4.76%, was forecast to decline 36 bps to 4.40% by end-June, and then to 4.10% and 3.69% in six and 12 months respectively, higher than in a March poll.
Schwab’s Jones said there was a roughly 300 bps gap between the top end of the fed funds rate range, 5.50%, and where inflation is currently headed, leaving room for the Fed to cut.
“I’m not saying they need to stimulate the economy, but there’s no reason to keep policy where it is,” Jones said.
Much will depend on inflation readings over coming months. The consumer price index report for March, due on Wednesday, is forecast to show inflation on an annual basis picking up to 3.4% from February’s 3.2%, a separate Reuters poll found.
However, some say the recent stickiness in inflation is more down to statistical nuance.
“We’ve had two months’ worth of warm inflation readings for noisy reasons, and if we get two months’ worth of cool inflation readings for noisy reasons, yields will come down pretty quickly,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
