By Sarupya Ganguly
BENGALURU, Oct 7 (Reuters) – US Treasury yields are forecast to fall over coming months, according to fixed income strategists in a Reuters poll who clung to their long-held view despite the benchmark 10-year yield recording its biggest quarterly jump since 1994.
However, conviction behind calls for lower yields, which strategists have been consistently wrong about over the past nine months, appears to be wavering.
Some strategists are basing their views on the position that financial markets have overdone pricing in a series of Federal Reserve interest rate hikes and policymakers may end up doing less.
Meanwhile, government borrowing costs have hit multi-decade peaks in many developed economies in recent weeks on fears of inflation from the US-Israeli war with Iran and rising central bank policy rates.
Heavy borrowing by tech giants to fund the AI buildout, coinciding with increased Treasury issuance, is only adding to rising yield pressure.
FED OUTLOOK GUIDING YIELD VIEW
Median views from nearly 60 strategists polled October 5-7 showed the benchmark yield easing around 30 basis points to 5.00% by year-end, 4.90% in six months and 4.75% in a year.
The 10-year yield has risen almost 120 basis points this year and is trading a whisker away from the 5.34% it hit last week, the highest since 2002.
“Unless the Federal Reserve hikes a lot more aggressively than we expect, yields are probably a little too high,” said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research. He said his models pointed to yields being more fairly valued between 4.50% and 5.00%.
Interest rate futures are pricing in at least three more Fed rate rises over the coming months. The latest set of Fed policymaker forecasts implied at least one more was coming this year.
That speculation has pushed up the rate-sensitive two-year yield roughly 40 basis points in the last month. According to the poll, it was forecast to fall about 10 basis points to 4.70% in three months, 4.60% in six and 4.25% in a year.
Still, all but 2 of a subset of 30 forecasters answering an additional question in the survey said the 10-year yield was more likely to land above their forecasts rather than below in the near term.
NINE MONTHS OF MISSES
The recent US Treasury yield surge comes despite efforts from US Treasury Secretary Scott Bessent in August to alter the schedule of debt issuance and attempt to increase long-end buybacks.
Reuters poll data show strategists have underestimated the 10-year yield’s rise in nine straight monthly surveys this year, getting the direction wrong in six of the most recent months.
Unexpected resilience in US growth is one reason. US GDP rose at a far-above-consensus 2.2% annualised rate in the second quarter.
Nordea, among the earliest in the surveys to correctly call higher yields, did so on the “stickiness of inflation pressures in the US”, its chief analyst Jan von Gerich said.
There was “a straightforward case” that term premium, the additional compensation investors demand for holding longer-dated debt, “has been too low”, he added.
Rates have entered “a different regime” from anything seen since the global financial crisis, said Meghan Swiber, director of US rates strategy at Bank of America.
“Long-end rates are really telling the Fed they should be doing more to tighten and rein in financial conditions — and a Fed not doing that is going to pay the consequence through higher longer-term rates,” BofA’s Swiber added.
“This is a divergence from how investors have been looking at rates over the past several decades. And there is inertia in investors’ thinking about how high rates are going to go.”
(Reporting by Sarupya Ganguly; Polling by Aman Kumar Soni; Editing by Ross Finley and Alison Williams)
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