According to a media survey of bond strategists, US Treasury yields are expected to remain at the current level for the next six months or so and then decline at the end of the year. This shows that the market has fully taken into account the Federal Reserve's possible interest rate cuts.
Since hitting a high of 5.02% in October last year, the US 10-year Treasury yield has declined by more than 120 basis points, and has basically returned to its initial level by the end of 2023.
The bull market in the bond market is pricing yields ahead of time by predicting interest rate cuts of about 150 basis points this year. This is based on the market's performance when the market generally believes that the Fed has a dovish attitude and inflation is slowing down.
With new economic data showing that the world's largest economy is still growing healthily, and there is no urgent need to cut interest rates, the yield has recovered to around 4% from a low of 3.78% at the end of December last year.
Interest rate futures are currently priced at about two-thirds of the possibility of cutting interest rates for the first time in March, down from about 90% two weeks ago. The Federal Reserve's own forecast shows that interest rates will be cut by 75 basis points this year.
According to a media survey of 62 bond strategists from January 5 to 10, the 10-year US Treasury yield is expected to rise by about 10 basis points to 4.1% within three months, which is 15 basis points lower than the December survey forecast.
Steven Major, head of global fixed income research at HSBC, said: “We expect yields to remain the same for the first three months; although this may sound tedious, this is how the bond market works.”
Major also said that although he has made concessions to some temporary fluctuations, “I am convinced that the next major change in yield will occur in the second half of the year because the market needs to see the central bank actually act, not just based on expectations.”
The survey also found that the standard 10-year US Treasury yield is expected to fall to 3.93% by the end of June, then drop further to 3.75% by the end of the year. A small survey of major US dealer banks predicted higher yields of 4% and 3.88%, respectively.
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, said, “Our vision for the future is a twin-peak model. On the one hand, it is a typical post-cycle recession, and on the other hand, interest rate cuts drive productivity increases, leading to stronger economic growth.”
He added: “The midpoint between these two scenarios could cause the 10-year yield to rise to around 4.7% by the end of 2024.” This is the highest year-end forecast in the survey.
The current interest rate sensitive 2-year US Treasury yield is around 4.35%. It is expected to remain stable over the next three months, then drop to 4% at the end of June, and fall further by 50 basis points to 3.5% by the end of the year.
If this forecast comes true, the negative yield gap between 2-year and 10-year US Treasury bonds — often seen as a sign of an impending recession — will completely disappear and expand to 25 basis points by the end of 2024.
Torsten Slok, chief economist at Apollo Global Management, said, “Last year's indicator didn't help predict a recession, and probably not this year.”
He also said, “The continued supply of US Treasury bonds will put considerable upward pressure on long-term interest rates, and this has nothing to do with whether we will enter a recession.” He also pointed out that factors such as the US budget deficit and the risk of another rise in inflation may keep yields at a high level.
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