Despite the Federal Reserve's aggressive 50 basis point rate cut in September, today, over a month later, this rate-cutting cycle seems to be becoming more and more "unlike" a rate-cutting cycle...

It may be hard to imagine that as of today, there are still Wall Street institutions predicting,$U.S. 10-Year Treasury Notes Yield (US10Y.BD)$expected to return above the 5% level next year, while with the increasing calls from Federal Reserve officials for gradual interest rate cuts, the prices of various maturities of U.S. bonds also plummeted across the board on Monday, with exaggerated double-digit daily basis point increases in the middle to long end of the yield curve...

All these unbelievable market voices and market changes seem to raise doubts among people for a moment:

Are we currently in the "early spring" of an easing cycle, or still in the "harsh winter" of a tightening cycle...

Bold prediction from Wall Street: the 10-year Treasury bond yield will return above 5% within six months

The most astonishing voice on the U.S. bond market on Monday undoubtedly comes from a research report by Arif Husain, Chief Investment Officer of Fixed Income at T. Rowe Price. In the report, he stated that rising inflation expectations and concerns about U.S. fiscal spending could soon push the benchmark 10-year U.S. Treasury bonds yield to the key level of 5%.

Husain pointed out that the 10-year U.S. Treasury bonds yield will test the 5% threshold within the next 6 months, making the yield curve steeper. The fastest path to reaching this threshold would be in the case of a slight rate cut by the Federal Reserve.

Looking back at the trend of the 10-year U.S. Treasury bonds yield, the last time this 'global asset pricing anchor' hit the 5% mark dates back to last October when the benchmark yield reached its highest level since 2007. At that time, the rise in the 10-year U.S. Treasury bonds yield was roughly in sync with the Fed's interest rate hikes, as the Fed raised the benchmark rate to a two-decade high range of 5.25%-5.50% in July last year.

However, against the backdrop of the Fed entering a rate-cutting cycle now, Husain still predicts a possible return of the 10-year U.S. Treasury bonds yield to 5%, seemingly not placing much emphasis on the Fed's rate-cut expectations.

Husain's given reason for this is that the U.S. Treasury is issuing bonds continuously to fill the government deficit, flooding the market with a large amount of new supply. At the same time, the Fed's quantitive tightening policy - attempting to shrink its balance sheet after years of bond purchases - has eliminated a key source of demand for government bonds.

Husain also stated that the most likely scenario for the Fed is to make a slight rate cut during this easing cycle - comparable to the rate cuts from 1995 to 1998. In this situation, China would inject more stimulus to help its domestic economy and drive global economic growth, providing a clearer outlook for Fed officials.

Of course, the Fed could also enter a normal easing cycle and lower rates to levels close to the neutral rate. Husain believes the neutral rate could be around 3%.

Husain also considered the scenario of the U.S. falling into an economic recession, which would prompt the Fed to actively cut rates. However, Husain emphasized, 'Investors who, like me, believe that a recent U.S. economic downturn is unlikely, should consider preparing for higher long-term U.S. Treasury bonds yields.'

Once Husain's latest forecast proves to be accurate, undoubtedly, the U.S. ​bonds market may erupt into a new round of turbulence and repricing. Media surveys of ​strategists previously expected, on average, the 10-year U.S. Treasury notes yield to decline to 3.67% by the second quarter of next year, which is far from Husain's forecast.

U.S. Treasury bonds plummeted overnight: medium to long-term yields all saw double-digit basis point increases!

Seemingly confirming Husain's bold prediction to some extent, ​​various maturity U.S. bonds yields also generally experienced double-digit surges this Monday. Although similar scenarios have frequently occurred after the Fed's interest rate cut in September, the market volatility on Monday was still jaw-dropping.

Market data shows that as of the end of Monday's New York session, ​​yields of various maturity U.S. bonds soared significantly. Among them, $U.S. 2-Year Treasury Notes Yield (US2Y.BD)$ increased by 8.1 basis points to 4.044%, $U.S. 5-Year Treasury Notes Yield (US5Y.BD)$ increased by 11 basis points to 3.998%, $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ Increased by 11.3 basis points to 4.205%. $U.S. 30-Year Treasury Bonds Yield (US30Y.BD)$ Increased by 10.8 basis points to 4.505%.

It is worth mentioning that closely related to the Fed rate expectations, $U.S. 2-Year Treasury Notes Yield (US2Y.BD)$ it has now closely followed the footsteps of the 10-year U.S. Treasury bond yield, rising above the 4% level.

The significant increase in U.S. Treasury bond yields on Monday was largely influenced by recent statements from several Fed officials. These officials are generally cautious about cutting interest rates, and this week is their last opportunity to express their views before the November decision blackout period.

USA Federal Reserve President Schmiede expressed on Monday that given the uncertainty of how low the Federal Reserve should ultimately cut interest rates, he tends to slow down the pace of rate cuts. Dallas Federal Reserve President Logan also pointed out that due to various uncertainties in the economic environment, the Federal Reserve should maintain caution in cutting interest rates, she supports a "gradual" rate cut. Minneapolis Federal Reserve Kashkari emphasized that he currently leans towards cutting rates at a slower pace over the next few quarters.

After Monday, the interest rate market has further reduced its forecast for the extent of interest rate cuts by the Federal Reserve within the year. The latest pricing shows that in the next two policy meetings, the Federal Reserve will cut interest rates by 39 basis points (the probability of skipping one meeting to cut rates is approaching fifty percent), while the pricing at the close of last Friday was 42 basis points.

Investors are currently still closely monitoring the geopolitical tensions in the Middle East and the U.S. presidential election on November 5, as developments in these areas could further trigger inflation and threaten the Fed's rate cut process.

JPMorgan analysts believe that as the yield curve continues to steepen, long-end yields may further increase.

Analysts like Jay Barry stated in a report, "Despite the recent increase in yields, the bearish trend suggests that long-end prices may further decline, we believe there is no catalyst in the near term to more dovishly reprice the Fed's policy expectations, and as November approaches, political developments may dominate price movements."

Editor/Rocky