Hopes for Fed rate cuts keep US Treasury yield views low ahead of supply deluge

Reuters

a day ago

BENGALURU, June 11 (Reuters) - U.S. Treasury yields are set to decline further according to bond strategists who are clinging to expectations the Federal Reserve resumes cutting interest rates after pausing for more than half a year even as dealers are set to underwrite a deluge of new supply.
A slight majority now expect another sell-off in longer-dated bonds, the maturities most at risk, by the end of this month.
Concerns that President Donald Trump's tax-cut and spending bill will add trillions of dollars to an already-staggering $36.2 trillion debt pile by 2034, along with tariff brinkmanship already have many holders of U.S. assets scrambling for the exit.
The rising "term premium" – what investors demand as compensation for holding longer-dated debt – leaves the market more vulnerable, particularly among foreign investors, ahead of upcoming Treasury bond auctions.
"The amount of debt we need to issue keeps rising and there doesn't appear to be anyone in Washington on either side that really has a plan to bring down deficits and address our fiscal situation," said Collin Martin, fixed income strategist, Schwab Center for Financial Research.
"That'll weigh on the long end of the curve where we need to see yields rise a bit to attract that marginal buyer."
Global sovereign bond yields have mostly risen in tandem over the past two months. A rapid sell-off in benchmark U.S. 10-year Treasuries in April pushed the yield up around 60 basis points.
That yield, which rises when prices fall, has since steadied, oscillating around 4.50%.
Median forecasts from nearly 50 bond strategists in a June 6-11 Reuters survey, most from dealers and sell-side firms, predicted the 10-year yield would decline a modest 13 bps to 4.35% in three months and to 4.29% in six from its current 4.48%.
Despite predicting a decline, more than half upgraded their forecasts from a May survey with many flagging the risk of yields moving higher.
"The 10-year will probably trade range-bound for a while between 4-4.50% and maybe even rise a little bit further, particularly given deficit concerns. The yield curve should continue to steepen as short-term yields drift gradually lower as the Fed cuts rates one or two more times by year-end," Schwab's Martin added.
The more interest rate-sensitive 2-year yield was forecast to decline a slightly steeper 17 bps to 3.85% in three months and to 3.73% by end-November, the survey showed.
Most economists polled by Reuters predict two or fewer rate cuts this year while rate futures are currently pricing two.
An ongoing auction for three-year Treasury notes has been met with somewhat tepid demand though markets will be paying closer attention to sales of longer-dated 10- and 30-year bonds this week.
"Given recent market behavior and the pressure we've seen on yields, it seems the long end of the yield curve is most susceptible to a supply-demand imbalance leading to higher rates," said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management.
"There has been some disruption at the long end of the curve and the 30-year Treasury bond supply is the biggest question mark for the week in light of all the supply that is hitting. But that isn't to say threes and 10s are going to be necessarily easy either."
A Reuters survey of foreign exchange strategists conducted last week showed a near-90% majority expecting a decline in demand for dollar-denominated assets this year with Europe widely slated to be the biggest beneficiary.
"On the bond side European investors who are looking at the U.S. market would normally hedge currency risk, but that's become very expensive. So on a hedged basis, Treasuries are just not very attractive to European investors anymore," said Chris Iggo, CIO of AXA IM Core, AXA Investment Managers.
"There's been a lot of talk about defence spending and infrastructure but you know 'Show me the money!' - we haven't really seen the opportunity set increased massively just yet."