Key facts
- US Treasury yields are forecast to fall over coming months, according to a Reuters poll.
- The benchmark 10-year Treasury yield recorded its biggest quarterly jump since 1994.
- Strategists expect the benchmark 10-year yield to ease to 5.00% by year-end, 4.90% in six months and 4.75% in a year.
- The 10-year yield has risen almost 120 basis points this year and is near a multi-decade high.
- Interest rate futures price in at least three more Fed rate rises.
- US GDP rose 2.2% in the second quarter, exceeding consensus.
US Treasury yields are expected to fall in the coming months, according to fixed income strategists surveyed by Reuters, despite the benchmark 10-year yield experiencing its largest quarterly increase since 1994. The strategists maintained their long-held view, though conviction appears to be wavering after nine months of consistently incorrect predictions.
Some strategists believe financial markets have over-anticipated Federal Reserve interest rate hikes, suggesting policymakers may implement fewer increases than currently priced in. This view contrasts with recent multi-decade highs in government borrowing costs across developed economies, driven by inflation fears linked to the US-Israeli war with Iran and rising central bank rates.
Increased Treasury issuance, compounded by heavy borrowing from tech giants funding AI buildouts, is also contributing to upward pressure on yields. The poll, conducted October 5-7 among nearly 60 strategists, forecasts the benchmark 10-year yield to ease by approximately 30 basis points to 5.00% by year-end, with further declines to 4.90% in six months and 4.75% in a year.
The 10-year yield has already climbed nearly 120 basis points this year and is trading close to 5.34%, its highest level since 2002. Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, suggested that yields are likely too high unless the Federal Reserve hikes rates more aggressively than anticipated, estimating a fairer valuation between 4.50% and 5.00% based on his models.
Interest rate futures indicate at least three more Fed rate hikes are expected in the coming months, with recent Fed policymaker forecasts implying at least one more hike this year. This speculation has driven the rate-sensitive two-year yield up by roughly 40 basis points in the past month. The poll forecasts the two-year yield to fall about 10 basis points to 4.70% in three months, 4.60% in six months, and 4.25% in a year.
However, a subset of 30 forecasters indicated that the 10-year yield is more likely to exceed their forecasts in the near term rather than fall short. The recent surge in US Treasury yields occurred despite efforts by US Treasury Secretary Scott Bessent in August to adjust debt issuance schedules and increase long-end buybacks. Strategists have underestimated the 10-year yield's rise in nine consecutive monthly surveys, getting the direction wrong in six of the most recent months. Factors contributing to this include the unexpected resilience of US growth, with GDP rising at a 2.2% annualized rate in the second quarter, and persistent inflation pressures in the US, according to Nordea's chief analyst Jan von Gerich. Meghan Swiber, director of US rates strategy at Bank of America, noted that long-end rates are signaling the Fed should tighten financial conditions further, and that a failure to do so will result in higher longer-term rates, marking a divergence from historical trends.