"US Treasury Yields Fluctuate Amid 'Already in the 3% Range' Pivot Outlook... 'Wall Street Predictions Missed the Mark'"

US 10-Year Treasury Yield Nears 3.8%
Wall Street's Year-End 4% Forecast Misses
Some Say "Bond Rally May Be Over"

As expectations for a Federal Reserve (Fed) interest rate cut in the United States rapidly spread, U.S. Treasury yields fell to levels that Wall Street had anticipated would be reached by the end of next year. Investors betting on rising bond prices (= falling yields) completely missed the mark of Wall Street experts' forecasts.

U.S. 10-Year Treasury Yield Trend
(*Unit: %, Source: LSEG)

On the 21st (local time), the yield on the U.S. 10-year Treasury note stood at around 3.89% in the global bond market. At the end of October, it was about 4.93%, but optimism about a rate cut in March next year caused it to drop more than one percentage point in about two months.

The fact that U.S. Treasury yields have already entered the 3% range far exceeds Wall Street’s expectations. Previously, major global banks such as Bank of America (BofA), Barclays, Deutsche Bank, and Standard Chartered (SC) had predicted that the 10-year U.S. Treasury yield would be above 4% around December next year. In a survey conducted last month by Bloomberg of more than 50 experts, the median forecast for the 10-year U.S. Treasury yield by the end of next year was also 4%.

The 10-year U.S. Treasury yield reaching the 3% range a year earlier than Wall Street expected is the result of inflation calming down and the Fed issuing dovish (monetary easing-favoring) signals, prompting investors to quickly bet on rate cuts. The Fed froze its benchmark interest rate twice in a row last month and then held it steady for the third consecutive time this month. The dot plot’s year-end rate forecast was also lowered from 5.1% in September to 4.6% this month. Furthermore, Fed Chair Jerome Powell surprised markets by signaling a pivot (a shift in monetary policy direction), which caused the bond market to react even more strongly. At a press conference held immediately after the rate freeze on the 13th, Powell said, "Discussions about when policy easing (rate cuts) will be appropriate have become more visible," fueling market expectations for rate cuts.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

Megan Sweber, U.S. rates strategist at BofA, said, "The Fed shifted direction very quickly, and yields moved quite rapidly as well. This shows how volatile the market has been and how conditional our understanding of the Fed’s trajectory is."

Global investment bank Goldman Sachs lowered its year-end forecast for the 10-year U.S. Treasury yield from 4.55% to 4% following Powell’s remarks. The interest rate futures market also responded immediately. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market on that day priced in more than a 70% chance that the Fed would cut the benchmark rate to 5?5.25% at the Federal Open Market Committee (FOMC) meeting in March next year. This is a significant increase from 64.7% a week ago and 29.4% a month ago.

However, some cautious views have emerged suggesting that the rally in U.S. Treasury prices, which move inversely to yields, may have ended. This is because although U.S. inflation and labor market overheating are slowing, they remain robust. According to the U.S. Department of Labor, new unemployment claims for the week of December 10?16 rose by 2,000 to 205,000 compared to the previous week. Experts analyze that although claims increased slightly, they remain at a low level. The final GDP growth rate for the U.S. third quarter was 4.9%, the highest since the fourth quarter of 2021. With the U.S. economy in such a solid state, some experts predict that inflation could rebound at any time and the timing of rate cuts could be delayed.

Luca Paolini, chief strategist at Pictet Asset Management, said, "Much of the gains we expected have been realized," adding, "Unless there is strong evidence of a significant slowdown in the labor market, the room for yields to continue falling is limited." He continued, "This rally has made everyone comfortable, but that is by no means a good sign. The key question is whether inflation can fall further. The market consensus is very optimistic, but no conclusion has been reached yet."

Deutsche Bank recently began reducing short-term Treasury investments, judging that the bond rally has peaked. Francis Jare, global head of rates research at Deutsche Bank, said, "This rally started too aggressively. We have done too much without evidence that the economy is fragile."

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