Original title: us bond yields break through three-week highs, investment banks make different forecasts for the future

On Tuesday, yields on u.s. 10-year bonds rose to 1.336%, the highest in more than three weeks. Treasury yields have risen for the fifth day in a row, the longest straight rise since early February.

Although US bond yields have returned to an one-month high, given that the US economy has rebounded from before (the US GDP was 6.5% in the second quarter, 943000 jobs were added in July, and consumer prices have risen 5% in the past year), the current level of yields is associated with rapid economic and employment growth, Qualcomm Inc.Inflation expectations run in the opposite direction.

The reason for the previous decline in US bond yields

To know what's going on, the first step is to break down long-term Treasury yields into two parts: inflation expectations and real yields after inflation.

Let's start with inflation.

By simply calculating the difference between yields on 10-year US Treasuries and 10-year US inflation protected bonds (TIPS), the market expects consumer prices to rise at an average annual rate of 2.4 per cent over the next decade.

Such predictions are normal. Because investors also seem to agree with the fed that once the current inflation surge ends, inflation will stabilize near the fed's average target of 2%. The Fed's preferred measure of inflation tends to be 0.25 to 0.5 percentage points lower than the bond market reflects.

In other words, inflation is not a drag on nominal yields. Now let's see if it's the real rate of return.

Surprisingly, the real yield on US debt is extremely low. Previously, 10-year TIPS yields fell to an all-time low of-1.2 per cent. More incredibly, real yields are falling even as the economy recovers.

The occurrence of this anomaly may be related to the following two reasons:

First, an ageing population in the developed world has led to more savings than investment, driving down yields on US Treasuries. This trend is unlikely to change any time soon.

Second, the Fed is still buying large amounts of long-term Treasuries. Since the Fed began buying assets in 2008, the effect of this quantitative easing has been evident in real yields: real yields usually fall whenever the Fed steps up its purchases.

This happens because the Fed withdraws long-term bonds from circulation and converts them into bank deposits and reserves. The Fed boosts demand by buying more bonds, as investors seek to increase their holdings of long-term bonds, with excess cash in deposits flowing into slightly higher-yielding securities, such as longer-term Treasurys, driving down yields.

Us bond yields will not stay low for long

How long will this last? The Fed is still buying $80 billion of Treasuries and $40 billion of mortgage-backed securities (MBS) every month. Total bank deposits in the United States reached $17.3 trillion last month, up from $13.4 trillion in February 2020. The Fed's reserves totaled nearly $4,000bn, up from $1.6 trillion before the outbreak.

With short-term interest rates close to zero, investors think they have no choice but to continue to buy longer-term bonds, and buying pressure is likely to increase as bond prices continue to rise.

However, in order to control inflation, the Fed will one day raise interest rates, and according to market expectations, US bond yields should not stay low for long. By then, investors' choices will no longer be limited to zero-yield deposits and 10-year Treasurys with a yield of 1.3 per cent.

And, given that the Fed is happy to see inflation pick up, it may then have to raise interest rates sharply, pushing up yields across all maturities. Quantitative easing had previously supported the bond bull market beyond levels consistent with longer-term fundamentals. This suggests that investors should adjust their positions in time and withdraw some funds in time before the end of the Fed's easing policy.

Investment bank forecast

BofA expects long-term US yields to remain in a range or fall slightly in the short term (4-6 weeks), as there are few clear catalysts to support the sell-off, coupled with positions and technical factors that limit the rise in interest rates; in the medium term (4-6 months), long-term interest rates are likely to rise due to strong fundamentals and finalised fiscal stimulus.

BofA believes that the debt ceiling issue will be a big factor, which may not be resolved until October:

"the Treasury will manage around the debt ceiling, leading to significant fluctuations in the supply of US Treasuries in the coming months."

Citi is firmly bullish on US bond yields. The bank believes that after the release of the employment report, it is difficult to see the Fed remain dovish until the end of the year. Citi maintained its expectation that the yield on the 10-year Treasury would reach 2% by the end of the year and said:

"the market underestimated the impact of underwriting on 10-year Treasuries and underestimated the level of the federal funds rate."

However, Goldman Sachs GroupAnd JPMorgan Chase & CoTwenty-five percent of U. S. interest rate strategists cut their year-end forecast for 10-year Treasury yields.

Goldman Sachs Group cut his forecast for the yield on 10-year Treasuries at the end of 2021 to 1.6 per cent from 1.9 per cent. The bank believes that:

"while yields appear to have fallen too much and are likely to reverse in the coming months as concerns about Delta subside and economic data are relatively strong, it may take time for long-term forward rates to return to levels last seen earlier this year."

JPMorgan Chase & Co strategists cut their 10-year and 30-year yield forecasts by 20 basis points to 1.75% and 2.40%, respectively. Because it believes that the upside in earnings rates in the coming months has "shrunk to a certain extent". JPMorgan Chase & Co expected the Fed to announce a reduction in size in November and said:

"gradually, we learned that the Fed's tolerance for inflation overshoot is not as large or as long as we previously understood."