According to bond strategists surveyed by Reuters, the recent strong decrease in US Treasury rates is on hold until later this year, with markets pushing against the Federal Reserve’s unrelenting pushback on the need for an early interest rate cut.
Benchmark 10-year rates plummeted into a tailspin around the end of the year after spending the majority of 2023 well over 4.0% as markets aggressively priced in a series of Fed interest rate decreases beginning in March.
The 10-year yield, which is now at 4.15%, fell ahead of the Federal Reserve’s policy meeting at the end of last month, anticipating a signal that borrowing prices would be reduced shortly.
However, the Fed delivered no such indication, leading markets to moderate expectations once again, with interest rate futures currently pricing in roughly a 55% likelihood of the first rate cut at the April 30-May 1 policy meeting, compared to over 90% for a drop at the March meeting at the start of the year.
Current rate futures pricing suggests more than 110 basis points of easing this year, which is still far higher than the Fed’s own projections of 75 basis points and the median 100 basis points projected by analysts in a separate Reuters survey conducted three weeks ago.
However, median projections from bond strategists in the Feb. 7-12 Reuters survey indicated that the 10-year note yield would trade largely constant in one to three months.
“Much of the focus was on (Fed) Chair (Jerome) Powell’s explicit push-back on expectations of a March cut… but the Fed moved to a genuinely neutral bias, which is a step in the dovish direction,” fixed income analysts at J.P. Morgan said in a recent research note.
Almost two-thirds of those questioned who responded to an extra question, 22 of 34, indicated the greatest risk to their six-month 10-year note yield estimate was that it would be higher than expected rather than lower.
“We now see concerns that the recent 10-year yield range may shift higher due to strong US data. Clients appeared to ‘buy the drop,’ but continuing solid data may challenge their belief,” noted Mark Cabana, head of U.S. rates strategy at Bank.
A nearly 40% minority of survey respondents, 17 out of 45, including several of the Fed’s key dealer banks, expected a yield of 4.0% or higher by the end of July.
“Markets expect the funds rate to reach the threes in a couple of years, and that’s what will give them indigestion and prevent an aggressive drop in yields – the fact that those expectations may be overly optimistic,” said Robert Tipp, chief investment strategist at PGIM Fixed Income.
The interest-rate-sensitive 2-year Treasury note yield, which is presently at 4.47%, will decline roughly 60 basis points to 3.92% by the end of July, then another 45 basis points to 3.47% in a year, according to the survey.