If we look back at history, how much will the 10-year US Treasury yield, known as the "anchor of global asset pricing," fall next year when the Federal Reserve first cuts interest rates? A report released by Bank of America this week provides an incredible answer - the lowest possible drop is 2.25%!
The Bank of America pointed out that the rise of US treasury bond bonds before the Federal Reserve cut interest rates for the first time may have just started.
At present, the 10-year US Treasury yield has fallen from the 16 year high of over 5% hit in October and continues to fall towards the 4% mark - the latest trading in late Thursday trading in New York was at 4.152%. According to Bank of America's analysis of bond trends between the last rate hike and the first rate cut in the history of the Federal Reserve, the 10-year US Treasury yield is likely to fall by up to nearly 200 basis points in the future.
Bank of America strategists Ralph Axel, Meghan Swiber and others said in the report sent to customers that since the 1988 cycle, in the past five interest rate increase cycles, whenever the Federal Reserve completed the last interest rate increase, the US treasury bond bonds will rise sharply before the first interest rate cut.
According to the calculations of strategists at Bank of America, the maximum decline in 10-year US Treasury yields during this period was 163 basis points, with an average decline of 107 basis points.
Therefore, if applied to the current situation, the answer is clearly already very clear.
Although the yield of US 10-year treasury bond bonds has dropped by about 90 basis points from the peak in October, it is still higher than the level when the Federal Reserve last raised interest rates to 5.25% to 5.5% in July. Based on the yield of 3.87% during the last interest rate hike in July this year, Bank of America strategists estimate that by May 2024, the yield on the 10-year US Treasury bond may drop as low as about 2.25%, and based on historical averages, it may drop to 2.8%.
May next year is also the window estimate for the first 25 basis point rate cut by the Federal Reserve in the money market.
Given that global central banks may shift their bets from rate hikes to rate cuts next year, this study by Bank of America has become the primary concern for investors. It undoubtedly helps people learn from the past and understand the possible trend of US bond yields. This will also have a ripple effect on the global market.
However, it should be pointed out that the second largest bank in the United States has not placed its predictions on the aforementioned research. The bank's own benchmark forecast remains that the 10-year US Treasury yield will be at 4.25% by the end of next year, which is not far from the current level.
Bank of America strategists remind that the above research is just a simple copy of historical trends. They also warned that lingering inflationary pressures may limit the rise of US Treasury bonds.