Shrinking Fed Rate Cut Expectations to Keep US Treasury Yields Elevated

• U.S. Treasury yields will plateau over the coming three months and then only fall modestly by year-end amid receding expectations of Federal Reserve interest rate cuts, according to a Reuters poll of bond strategists. After peaking at 5.02% in October, the benchmark U.S. 10-year Treasury note yield plummeted over 120 basis points (bps) as traders priced in as much as 150 bps of Fed rate cuts this year.
• Mostly strong U.S. economic data and inflation still higher than the Fed's target have pushed financial markets to limit those expectations to only two 25-bp rate reductions this year, starting September. Economists in a separate Reuters survey shared that view, saying there was a considerable risk of only one or even no rate cuts in 2024.
• That repricing in interest rate futures has caused the yield to bounce back up to 4.44%, though the path has been volatile - traversing a near-40 bps range in just the last two weeks. The U.S. 10-year note yield, seen roughly steady at 4.35% at end-August, is then forecast to decline to 4.23% and 4.13% in six and 12 months respectively, according to median forecasts from 55 fixed-income strategists and analysts in a June 6-11 Reuters poll.
• "For yields, we think it's choppier sideways and then lower towards the end of the year. We're still in the camp of inflation pressures easing and eventual Fed rate cuts - one or two - by year-end," said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
• Much of the direction of yields over coming months will depend on messaging from the central bank's policy-setting meeting on Wednesday, with updated economic projections expected to show fewer rate cuts than anticipated in March.

(Source: Reuters)