Shrinking Fed rate cut expectations to keep US Treasury yields elevated: Reuters poll

By Sarupya Ganguly

BENGALURU (Reuters) - 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% currently, 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 more choppy 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.

"But there's going to be continued volatility because the market's reaction to every data release will remain amplified and if they don't meet expectations, we'll get a big reaction. We have to acknowledge the economy over the last couple of years has been a lot more resilient than most people expected."

Robust economic data has also driven strategists to push up median forecasts for the interest-rate sensitive 2-year Treasury note yield - now seen falling only 22 bps to 4.62% by end-August and about 40 bps to 4.45% in six months from 4.84% currently.

"Most of the soft data - the surveys and so on - have come in weaker than expected so far, leading forecasters to believe a weakening in the economy is just around the corner; whereas hard data has continued to be strong," Jabaz Mathai, head of G10 rates and FX at Citi, said.

"So the question in people's minds - the timing of when the economy actually goes into a recession - has been extremely difficult to answer, causing the postponement of rate cut pricing. It's a mixed environment, so rates are likely to stay in a range in the near-term," Mathai added.

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.

Asked what was more likely for the U.S. yield curve over the coming month, 70% of respondents, 14 of 20, said it would steepen, nine of whom said it would be led by short-term bond yields declining more than long-term ones, or 'bull steepening'.

Five said 'bear steepening' was more likely, four said 'bull flattening', while two chose 'bear flattening'.

(Reporting by Sarupya Ganguly; Polling by Pranoy Krishna and Indradip Ghosh; Editing by Jonathan Cable, Ross Finley and Mark Potter)