The overall rise and fall of US Treasury yields on Tuesday were mixed, and it can be maintained above the several month low reached last week. Investors are continuing to digest the statements of Federal Reserve officials in search of the latest clues on when interest rate cuts will begin next year.
Market data shows that the yield of US Treasury bonds with different maturities has generally fallen into a narrow range of sideways consolidation overnight. As of the end of the New York session, the 2-year US Treasury yield fell slightly by 0.1 basis points to 4.45%, the 5-year US Treasury yield rose slightly by 0.9 basis points to 3.942%, the 10-year US Treasury yield rose slightly by 0.4 basis points to 3.936%, and the 30-year US Treasury yield fell slightly by 0.3 basis points to 4.041%.
The Federal Reserve announced at last Wednesday's meeting that interest rates would remain unchanged and hinted at a possible 75 basis point rate cut in 2024. After the meeting, Federal Reserve Chairman Powell's remarks were interpreted by market traders as dovish, leading to a continuous decline in yields.
However, since then, several Federal Reserve officials have refuted market expectations of a rate cut as early as March, including Chicago Fed Chairman Goolsby's statement on Monday and New York Fed Chairman Williams's statement last Friday, both signaling that the Fed is not in a hurry to cut rates immediately. On Tuesday, Atlanta Fed Chairman Bostic also stated that given the strong momentum of the US economy and the need to ensure inflation returns to the Fed's 2% target, there is currently no "urgency" to cut interest rates.
"The market is still trying to understand the exact time, magnitude, and trigger point of the interest rate cut, and they are currently struggling to cope with these," said Gennady Goldberg, head of US interest rate strategy at Dao Ming Securities
The main focus of the US economy this week will be the Personal Consumption Expenditure (PCE) Price Index released on Friday, which may provide new clues to inflation and the possible path of Federal Reserve policy. Goldberg believes that if inflation falls below market expectations, you may see a continuation of recent trends. It seems that the Federal Reserve's shift is largely due to lower than expected inflation, which allows them to start discussing interest rate cuts earlier than previously suggested.
The Bank of Japan's decision on Tuesday to maintain its ultra loose policy, as widely expected by the market, also provided some support for US Treasury bonds. If the Bank of Japan's policy is not so dovish, which leads to the rise in the yield of Japanese treasury bond bonds, it may curb the long-term demand of Japanese investors for US bonds - after considering the cost of foreign exchange hedging, this will happen once Japanese treasury bond bonds are more attractive than US treasury bond.
Data released by the US Treasury Department on Tuesday showed that the size of US treasury bond bonds held by Japan in October increased from US $1.086 trillion in September to US $1.098 trillion, still the largest holder of US debt outside the US.
The latest prediction from ten major Wall Street firms: Where will the 10-year US Treasury yield move towards next year?
It is worth mentioning that as the end of the year approaches, more and more Wall Street giants have also made their own predictions on the direction of US bond yields next year. At this time last year, many investors believed that 2023 was the year of bonds. However, this expectation ultimately shattered as the economy and inflation proved to be more resilient than expected, and the economy avoided recession this year, leading to the Federal Reserve continuing its largest interest rate hike cycle in decades for most of this year.
Although the economy has started to slow down recently and the Federal Reserve has stopped tightening policies, it is expected that US Treasury bonds will avoid a third consecutive year of decline. However, this increase is clearly not enough to justify the "year of bonds". So, what is the outlook of Wall Street's big banks for next year's bond market now?
Overall, with the significant dovish shift in Federal Reserve policy last week leading to an epic decline in US bond yields, many Wall Street strategists quickly "tore up" their 2024 expectations made only a few days ago and revised their forecasts. However, the divergence between long and short positions remains evident.
Daoming Securities is one of the most bullish institutions in the bond market, while Bank of America and Barclays are among the skeptical camp. The following are ten Wall Street institutions predicting the rise and fall (basis points) of 10-year US Treasury yields by the end of next year compared to current levels:
Among them, Dao Ming Securities predicts that the Federal Reserve will start cutting interest rates from May next year, with a cumulative reduction of up to 200 basis points. Therefore, they boldly assert that the 10-year US Treasury yield may plummet to 3% from the current year.
The forecasts of other investment banks are generally within 50 basis points of the current level of 10-year US Treasury yields (3.93%). Bank of America still expects the 10-year yield to be 4.25% by this time next year, but acknowledges that the new stance of the Federal Reserve has brought downside risks to our predictions. Morgan Stanley's expectation is 3.95%, JPMorgan Chase's expectation is 3.65%, and Citigroup's expectation is 3.90%.
Goldman Sachs and Barclays have both recently adjusted their previous views on the impossibility of interest rate cuts before the fourth quarter of next year, but their predictions for next year's US Treasury yields remain high - with 10-year Treasury yields expected to reach 4% and 4.35% by the end of 2024, respectively.
Bryce Doty, head of the bond fund team under Sit Investment Associates, said, "Every time you see a discrepancy in the estimated range, you know that a trend has ended and a new trend is about to begin.". Doty added that the dovish shift by the Federal Reserve is "sounding the alarm that you are currently at a turning point."
It is worth mentioning that, in addition to the impact of interest rate fluctuations, the differences in the estimates of US bond yields between major Wall Street firms may also take into account how long the Federal Reserve's balance sheet tightening policy will continue. The Federal Reserve is reducing its holdings of US treasury bond bonds at a rate of up to US $60 billion per month.
NatWest's expectation for the Federal Reserve's interest rate cut in 2024 even exceeded that of Dominic Bank, but according to a report from the agency in early December, it expects the QT to continue until the end of the year; By contrast, Dao Ming Bank predicts that QT will stop when monetary easing policy begins.
Interestingly, there are still some industry insiders planning to sing the slogan of "bond year" into the new year. Jeffrey's analysts told clients on December 11th that "we expect 2024 to be a fixed income year, and as central banks around the world begin to cut interest rates, bond performance will outperform stocks.". However, analysts at the bank also remind that "in the eyes of analysts in multiple other industries, 2024 may be another challenging year for macro forecasting."