Forecasts for U.S. Treasury yields from bond experts have increased for a second consecutive month, driven by expectations for limited additional rate cuts from the Federal Reserve and escalating inflation risks in 2025, according to a Reuters survey.
After initiating its easing cycle with a significant half-percentage point reduction in September, the central bank reduced its fed funds rate (USFOMC=ECI), opens new tab by 75 basis points and appears poised to cut another 25 bps on Wednesday, bringing it to a range of 4.25%-4.50%.
However, since the initial cut, the key U.S. 10-year Treasury yield, which moves inversely to prices, has surged approximately 70 basis points, reaching nearly a six-month peak of 4.50% last month.
The strength of the largest global economy and proposed policies by President-elect Donald Trump, including tariffs and tax reductions – all anticipated to boost inflation – have dampened the Fed’s easing intentions and increased yields, especially on longer-term bonds.
Although the benchmark 10-year yield has eased to roughly 4.40%, the median forecast from a Dec. 12-17 Reuters poll suggested it would modestly decline to 4.25% in a year – higher than the 4.10% recorded last month and 50 bps above an October median.
Approximately 55% of forecasters increased their twelve-month predictions for the 10-year note yield from November.
“If Trump’s policies concentrate on driving growth through rising deficits, rates have additional room to escalate,” stated Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.
“Over the next couple of years, it seems unlikely those deficits will significantly decrease – which implies the government will need to issue a considerable amount of Treasuries to support spending.”
An estimate from the Committee for a Responsible Federal Budget on Oct. 28 indicated that Trump’s proposed measures could elevate U.S. fiscal debt by $7.75 trillion over the coming decade.
“Inflation was sharply declining during the summer, but that trend has now halted. The labor market has softened somewhat, yet remains strong. Consumer spending holds up, and stocks are reaching all-time highs. Financial conditions may be looser than the Fed perceives,” Ren added.
“Should the Fed persist in cutting rates amidst this robust bull market, long-end rates will continue to rise.”
Consistent with interest rate futures, economists surveyed by Reuters last week are now anticipating only three more quarter-point rate reductions next year – half of the amount previously expected at the beginning of the year.
Nevertheless, forecasters generally maintained a cautious stance in their projections for elevated yields.
Survey medians from 44 strategists indicated the benchmark yield slightly under current levels at 4.30% in three months and 4.27% by the end of May, although both forecasts are higher than those from November.
“Market rates are likely to stay around current levels,” remarked Robert Tipp, chief investment strategist at PGIM Fixed Income. “While the Fed is expected to continue its cuts, it certainly won’t be the one-cut-per-meeting rhythm that some have priced in over the past several quarters.”
A strong majority, 15 out of 20 strategists, responding to a supplementary question, indicated that the 10-year yield is unlikely to breach 5% next year, with the last occurrence being in October 2023.
“One potential scenario we evaluated is a ‘higher for longer’ yield curve, where the 10-year yield could revert to 5%. In that situation, extending duration, meaning purchasing longer-dated bonds, could be harmful. However, this isn’t our primary expectation,” said Hong Cheng, head of fixed income and currency research at Morningstar.
