POLL-Bond strategists slam US Treasury yield forecasts
BANGALURU, January 27 (Reuters) – U.S. Treasury yields a year ahead are set to trade significantly lower than the level expected by bond strategists polled by Reuters just a month ago, underscoring how diverging financial markets have been this year from the perspective of the central bank.
While the US economy grew at an annualized rate of 2.9% in the last quarter of last year, it is clearly losing momentum. Market traders and policymakers differ on the severity of the downturn ahead, as well as the likely policy response.
Bond strategists at JPMorgan recently noted that the US Treasury market is already priced for a recession and not just the heightened risks of a recession.
“In the last rally, Treasuries moved further away from their underlying drivers… 10-year yields look 30 basis points too low after control for Fed market policy and growth expectations,” they wrote in a recent note.
Already far from their highs of late last year and early 2023, major benchmark government bond yields have fallen 20 to 40 basis points since then, and more than 50 basis points on the 2-year US Treasury yield particularly sensitive to rates.
Economists – many of them from the same banks – generally expect the Federal Reserve to raise interest rates several times before pausing, with no cuts expected this year, suggesting that lower yields two years is too early.
They also say the risk to their outlook is that rates remain upper longer, rather than the other way around.
10-Year U.S. Treasury Benchmark Yields US10YT=RR are expected to rise from 3.50% on Thursday to 3.70% in three months, then fall to 3.60% and 3.25% in six and 12 months, respectively, in the January 18-27 Reuters poll of 58 strategists .
This is about 30 basis points lower on the one-year horizon than a poll published in December.
Two-year US yields US2YT=RR are also expected to decline from around 4.15% currently to 3.52% a year from now, more than 40 basis points below the 3.94% forecast in last month’s survey.
This would extend one of the longest periods on record where two-year yields have been higher than 10-year ones, an inversion of the yield curve. Every U.S. recession since 1955 was preceded by an inverted yield curve.
But the Fed has signaled it’s not even ready to consider cutting interest rates anytime soon.
“While markets are currently pricing in the first cut at the end of 2023, we expect the first cut only in the first quarter of 2024 and expect the curve to remain inverted for longer as initial rates remain elevated and the long term continues. growth momentum,” said Priya Misra, head of global rates strategy at TD Securities.
Sovereign bond yields in the eurozone and Britain, where policymakers have also not finished raising rates and are grappling with even higher inflation than in the US, are also expected. drop in a year.
The poll predicted German Bund yields DE10YT=RR from their current level of 2.25% to around 2.4% in three and six months. They were then to fall back to 2.05% within a year.
Golden returns GB10YT=RRlast trading around 3.30%, are expected to rise and peak at 3.45% by the end of March and remain close to these levels for another three months, then fall back to 3.20% by the end of March. end of the year.
Reuters Poll – Key Benchmark Returnshttps://tmsnrt.rs/3Rd6SJq
(Reporting by Hari Kishan; Polling by Mumal Rathore and Vijayalakshmi Srinivasan; Editing by Sharon Singleton)
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