year Treasury yield to trade near 5%, risk is to higher rates in coming months
By Sarupya Ganguly
BENGALURU, Nov 11 (Reuters) - US 10-year Treasury yields will trade close to 5% in coming months, according to bond strategists polled by Reuters this week who mostly stuck to long-held views yields will drift downwards in the midst of market turmoil.
Forecasters again broadly agreed that risks to their forecasts were tilted toward higher yields. Having got the 10-year’s direction wrong in most polls this year, they also no longer expect yields to fall in the near term.
Hot inflation data on Tuesday and concurrent warnings from Federal Reserve officials about rates needing to rise in coming months whipsawed bond markets and put inflation worries back at front and centre for investors and households.
Since peaking at 5.36% in early October, the benchmark yield fell nearly 50 basis points with the tumble in crude oil prices, the root of inflation concerns since the US-Israeli war with Iran began in late February. But on Tuesday the 10-year yield climbed back to around 5%.
The rate-sensitive 2-year yield jumped about 20 basis points on Tuesday to 4.75%, completely reversing the sharp decline since the last monthly poll was published in October.
That 'bear-flattened' the yield curve, with short-dated yields rising faster than long-dated ones. The gap between two- and 10-year yields narrowed about 15 bps in the past week.
With yields back to where they were weeks ago, strategists in the November 9-11 poll, which straddled Tuesday’s consumer price inflation release, had little reason for big revisions.
Medians put the 10-year yield at 5.00% in three months and 4.96% in six, broadly unchanged from October and the two-year at 4.66% and 4.59%, respectively.
But nearly 80%, 23 of 30, said the 10-year was likelier to end above their three-month forecast than below.
“We probably haven’t seen the highs in yields for the cycle,” said Brian Rehling, head of global fixed income strategy at Wells Fargo Investment Institute. “The only way you get lower yields is if you have a...more material slowdown in the economy. I just don’t see that right now.”
“For the Fed to maintain credibility, they have to continue to hike rates. If we go into December and they’re still looking for reasons not to hike, markets are going to question the Fed’s willingness to do what it takes,” he added.
Fed officials have turned up the heat on policy warnings in the last 24 hours. Fed Governor Christopher Waller said on Tuesday a half-point December hike may be needed after the Fed held rates in October, pushing rate futures to now price nearly three hikes, up from two.
Bank of America economists wrote after the latest consumer price inflation data were published on Tuesday the Fed “seems to be falling behind the curve on inflation, and the October hold is looking like a policy mistake.”
A LOT MORE TREASURY SUPPLY AHEAD
US debt recently topped $40 trillion and last week’s quarterly refunding announcement from the Treasury on borrowing plans signalled no let-up in issuance, leaving short- and intermediate-dated debt to absorb a greater portion of the government's rising borrowing needs.
That partly explains why short-dated securities underperformed in the recent sell-off.
But strategists still see yields falling over the next year to medians of 4.75% for the 10-year and 4.33% for the two-year. That implies the yield curve will steepen again with the 2s-10s gap widening to about 40 bps.
“There’s a higher structural floor under long-term yields,” said Kelley Gerrity, managing director and portfolio manager at Morgan Stanley Investment Management. Private investors must increasingly absorb heavy supply, she said, with the Fed having “predominantly...stepped away”.
Tech giants borrowing to build AI data centres add to the competition with long-dated debt that vies for “insurance, pension, and institutional demand”, Gerrity added.
Asked whether their outlook for next year’s AI-related corporate bond issuance had changed since the US midterm elections last week, where Democrats took control of both chambers of Congress, 11 of 20 strategists said no. Nine expected lesser issuance.