BENGALURU (Reuters) – Bond strategists polled by Reuters expect U.S. Treasury yields to fall sharply in the next year.
Two-year US Treasury bond yields plummeted by more than 100 basis points following the failures of some US regional banks last month. He peaked above 5% on March 8, following hawkish testimony from Federal Reserve Chairman Jerome Powell.
The Fed’s rhetoric has softened a bit since then, but with policymakers largely focused on containing inflation and staying more than double their 2% target, at least one more rate hike is likely in May. I am waiting.
But the market is pricing in a series of rate cuts starting just two months from now, highlighting a stark contrast to the central bank’s own views.
The recent decline in yields is expected to continue, according to an April 5-12 poll of more than 60 fixed income strategists.
Yield forecasts have been cut significantly across maturities since last month, but the outlook for the short end of the yield curve, which is most sensitive to policy rate changes, has been cut significantly, suggesting a steepening of the yield curve.
Two-year U.S. Treasury yields, currently trading at around 4.0%, are expected to fall about 50 basis points to 3.45% over the next 12 months, down 40 basis points from last month’s survey.
Over the next three months, however, 2-year and 10-year yields were expected to rise by 20 and 25 basis points, respectively, before falling again.
“(Rate cuts) the curve has steepened sharply as prices continue to rise. No,” said Priya Misra’s head of rate strategy. TD Securities.
“Pricing an immediate rate cut is likely too aggressive, but markets continue to overreact to weak data,” Misra said.
At the longer end of the curve, the benchmark U.S. 10-year yield, which has fallen more than 50 basis points from its March 2 cycle peak, is set to decline another 10 basis points over the next year, polls show. rice field.
Inverse spreads between 2-year and 10-year Treasuries are usually a reliable indicator of an impending recession and are projected to approach about 10 basis points next year, according to the latest research. This will be the narrowest since July last year.
Meanwhile, a still-strong labor market and persistent inflation continue to tell the story of a resilient economy rather than a typical scenario for pricing in an imminent rate cut.
A separate Reuters poll of economists said the Fed would raise interest rates again by 25 basis points to 5.00% to 5.25% in May, before keeping key rates unchanged until at least the end of 2023.
A survey of fixed income strategists showed U.S. 2-year yields to fall further, but the majority of respondents to the latest economic survey expect to see 25% at least once by the end of Q1 2024. We expect a basis point rate cut.
Relatively high volatility has also driven yield forecasts over the past few months.
The widely-held MOVE Index (.MOVE), which tracks bond market volatility, is currently more than 50% higher than its long-term average, so strategists responding to another question were left wondering what volatility might be in the next three months. Opinions were divided. .
A majority of 12 out of 23 respondents said volatility would increase. The rest said it would decline.
“Right now, the market appears to be calming down as there are no more bank casualties,” Bas van Geffen, senior macro strategist at Rabobank, wrote in a note to clients.
“However, anxiety can easily flare up and the resulting tightening in credit conditions can range from mild to severe.”
Reported by Sarupya Ganguly and Indradip Ghosh. Poll by Shaloo Shrivastava and Aditi Verma.Edited by Hari Kishan, Ross Finley and Toby Chopra
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