The 10-year Treasury yield isn’t likely to push much above 3.85% for the rest of this year, unless three things happen, according to BCA Research.
The benchmark 10-year rate
TMUBMUSD10Y,
reclaimed the 3.85% mark in late May and has roughly held in that range in June, following a sharp drop in bond yields this spring after Silicon Valley Bank’s collapse in March sparked fears of broader instability at regional banks.
See: What ‘unprecedented’ volatility in the $24 trillion Treasury bond market looks like
BCA Researchers said in a Tuesday client note they expect that to be the top end of the 10-year Treasury yield’s range this year, with core inflation, which omits food and energy, having “significant downside during the next six months.”
Their view has been emboldened by the relative steadiness of the 10-year rate after the Federal Reserve at its June meeting penciled in only two more potential rate hikes this year, signaling the end of its dramatic rate-hiking cycle could be coming soon.
However, continued stickiness in “non-housing,” core services inflation would be a risk to that scenario, the BCA team said, including if wage growth in the healthcare industry “encourages the Fed to keep lifting rates through the second half of this year, sending bond yields higher.”
The yearly rate of U.S. inflation, as measured by the consumer-price index, slowed to 4% in May after peaking above 9% last summer, even though the core rate has been harder to tame.
A second risk to their call for “bullish bond positioning” is if the market for short-term interest rates continues to expect the Fed not to deliver the 50 basis points of additional rate increases it penciled in for 2023 in June.
While traders in fed-funds futures on Tuesday were pricing in a nearly 77% chance of a 25-basis-point hike to a 5.25%-5.5% range at the central bank’s July meeting, the odds of a 50-basis-point increase to a 5.5%-5.75% range though its December meeting were at only about 8%, according to the CME FedWatch Tool.
“We also believe that inflation will be soft enough for the Fed to deliver less tightening than it currently forecasts, but there is a material risk that both us and the market are misjudging the Fed’s inflation-fighting resolve,” wrote the BCA team led by U.S. bond strategist Ryan Swift.
Finally, a third risk to their call is the strong consensus around a “bullish bond view,” with JPMorgan’s Treasury Investor Sentiment Survey showing the largest net long positioning among all clients since 2010.
As when investors get bullish about stocks, “traditional investment logic tells us that extreme one-way positioning in any market should be viewed as a contrarian indicator,” Swift’s team said.
Stocks closed lower Tuesday, after recently hitting their highest levels in over a year, as investors awaited Fed Chairman Jerome Powell to kick off two days of congressional testimony on monetary policy on Wednesday, including potentially offering more insights into the outlook for interest rates for the rest of 2023.
U.S. economists Alex Pelle and Steven Ricchiuto at Mizuho Securities said Tuesday that if Fed officials were “trying to send a message” last week with their latest summary of economic projections and their “dot plot” for the path of interest rates, “the market did not take it seriously.”
But in a client note, they also said Powell has previously used testimony to Congress “to shock markets.”
The Dow Jones Industrial Average
DJIA,
shed about 0.7% Tuesday, the S&P 500
SPX,
fell 0.5% and the Nasdaq Composite Index
COMP,
closed 0.2% lower, according to FactSet.
See: Stock-market investors ‘clearly overweight’ U.S. equities as ‘FOMO’ takes over rally