By Sarupya Ganguly

U.S. Treasury Yield Forecasts Rise

BENGALURU – U.S. Treasury yield forecasts from bond strategists have increased for a second month, driven by expectations of limited remaining Federal Reserve rate reductions and rising inflation risks in 2025, according to a Reuters survey.

Following a significant half-percentage point cut in September, the central bank has reduced its fed funds rate by 75 basis points and is expected to lower it by another 25 bps on Wednesday, bringing it to 4.25%-4.50%.

Since the initial rate cut, the benchmark U.S. 10-year Treasury yield, which moves inversely to prices, has surged nearly 70 basis points, reaching a near six-month high of 4.50% last month.

The strength of the world’s largest economy and President-elect Donald Trump’s proposed economic policies—ranging from tariffs to tax cuts—are expected to be inflationary, dampening the Fed’s easing plans and pushing yields higher, particularly for longer-term bonds.

While the benchmark 10-year yield has toned down to about 4.40%, a median forecast from a December 12-17 Reuters poll predicted it would modestly decline to 4.25% in a year. This figure is still higher than the recorded 4.10% last month and 50 bps above an October median.

Around 55% of forecasters raised their twelve-month yield expectations for the 10-year note since November. Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, remarked, "If Trump's policies focus on pushing growth up via increasing deficits, rates have even more room to move up."

An October 28th estimate from the Committee for a Responsible Federal Budget suggested that Trump's proposed policies could raise U.S. fiscal debt by $7.75 trillion over the next decade.

Ren added, "Inflation was coming down sharply during the summer, but now that has stopped. The labor market has weakened a bit, but remains strong. Consumer spending is resilient and equities are hitting record highs. Financial conditions may not be as tight as the Fed thinks."

Economists surveyed by Reuters now expect only three more quarter-point rate cuts next year, a halving of earlier predictions. However, forecasters are still cautious in their higher yield predictions.

Survey medians from 44 strategists indicate the benchmark yield slightly below current levels at 4.30% in three months and 4.27% at the end of May, though both forecasts are higher than November’s.

Robert Tipp, chief investment strategist at PGIM Fixed Income, stated, "Market rates are likely to remain around current levels. While the Fed is likely to continue to cut, it definitely won't be the one-cut-per-meeting pace priced in at some points over the last several quarters."

A significant majority of strategists, 15 of 20, indicated the 10-year yield is unlikely to cross 5% next year, the last occurrence being in October 2023.

Hong Cheng, head of fixed income and currency research at Morningstar, remarked on a potential scenario where a 'higher for longer' yield curve may see the 10-year yield return to 5%, suggesting that in such cases, extending duration by purchasing longer-dated bonds could be detrimental. However, he noted this is not their base case.