Inflation optimism will cause U.S. Treasury yields to decline Reuters Poll

According to fixed-income strategists surveyed by Reuters, U.S. Treasury yields will generally decline over the upcoming year on anticipation the Federal Reserve will soon complete its raising cycle. They also projected a steeper yield curve.


The yield on the US 2-year Treasury note has increased almost 150 basis points from its low on March 24 and last week to a sixteen-year high of 5.12% as a tight labor market and still-sticky inflation hinted that more rate hikes are necessary.

The yield, however, has since dropped by roughly 25 basis points (bps) as markets took recent comments from Fed members as indicating the raising cycle was coming to an end as the U.S. economy added the fewest jobs in about two and a half years.

The Reuters survey of 75 bond strategists conducted from July 5 to 12 found that the recent decrease in yields will continue over the next year.

“At the present, economic data shows a respectable momentum. That will go away in a few months, according to Thomas Simons, senior money markets economist at Jefferies, who anticipates a general decline in yields in the near future.

The market will predict a fairly aggressive path of impending rate reduction.

According to the poll, the yield on the interest rate-sensitive U.S. two-year note will fall by around 70 basis points to 4.15% by year’s end.

According to the survey conducted last month, the benchmark U.S. 10-year note yield, which is now at 3.95%, will reach 3.50% in six months.

If realized, this would reduce the current spread between the two-year and ten-year Treasury yields from 90 bps to 65 bps by the end of 2023.

As the Fed predicts additional raises later this year, the curve is expected to stay significantly inverted. The first cut is anticipated to occur in Q1 2024, according to Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. “We expect gradual steepening in Q4 and more dramatic steepening in Q1 2024,” he said.

Slowing inflation and data on the labor market should make the curve steeper.

Market estimates based on interest rate futures continue to differ from the Fed’s outlook, with only one additional rate hike anticipated this year compared to the Fed’s prediction of two. For March 2024, the first rate reduction is currently anticipated.

As a result, yields have decreased and bond market volatility has increased.

The most popular volatility gauge, the MOVE index, reached a five-week high last week and is now almost 50% above its long-term normal.

Many people who anticipate a more pronounced decrease in price pressures and lower bond yields view the Fed’s inflation estimates as being overly pessimistic.

“Even if one assumes slower progress on inflation, six-month rolling inflation (180-day moving average) will still break out of its range in the next two months, heralding the end of’sticky inflation’ that has consumed markets in the last two years,” noted Guneet Dhingra and Allen Liu, bond strategists at Morgan Stanley (NYSE:MS).