U.S. Treasury yields will remain range-bound over coming months as mounting concerns of an economic downturn dominate tariff-linked inflation fears, pushing bond strategists in a Reuters poll to broadly revise their yield forecasts lower from last month.
Recent weakness in macro data coupled with President Donald Trump's comment that sweeping tariffs could cause Americans some "short-term" pain has raised recession risks in the world's largest economy and sent the benchmark U.S. 10-year Treasury yield plunging nearly 60 basis points since mid-January.
Heightened investor trepidation has also threatened the long-standing ‘U.S. exceptionalism’ trade and wiped out nearly $4 trillion from the S&P 500 (.SPX), now down over 8% since its February 19 all-time high.
Over 75% of bond strategists, 20 of 26, responding to an additional question in a March 5-11 Reuters survey said the risk to their three-month forecast for the 10-year Treasury note had shifted towards lower yields. Five said higher, one said no change.
That was a marked change from a growing trend of strategists predicting higher yields in a February survey on fears tariffs would light a fire under inflation expectations.
"In the next few months, market participants and investors are going to be much more focused on growth downsides versus inflation upsides. That's why we believe yields are more likely to trend a little lower from where they are at the moment," said Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management.
A 95% majority of economists, 70 of 74, polled last week across Canada, the U.S. and Mexico said recession risks in their respective economies had increased as a result of Trump's chaotic tariff implementation.
Interest rate futures are now pricing three Federal Reserve rate reductions by year-end, flirting with a fourth — a far cry from one or two expected earlier this year.
"You're going to have to see incoming economic data actually deteriorate versus only the expectations of it deteriorating to see the next down in rates," said Mike Sanders, head of fixed income at investment manager Madison Investments.
"Data are a little softer, but nothing to the extent that would justify the rate path that's getting priced in at the moment."
The benchmark U.S. 10-year Treasury yield, currently about 4.20%, will rise to 4.40% at end-May, lower than the 4.53% predicted last month. It will increase to 4.45% in six months, a level it was expected to hold in a year, according to median forecasts from 40 strategists. Yields move inversely to prices.
"There will be a bit of volatility, but we'll stay in that 4-5% range on the 10-year yield for the first half of 2025...the on-again off-again nature of shifts have caused policy fatigue and uncertainty, and that weighs on capital expenditure and business activity for the medium- and long term," Morgan Stanley's Khanduja added.
Meanwhile, Germany's prospective coalition parties are radically reshaping fiscal policy by agreeing on a 500-billion-euro infrastructure fund and reforming borrowing rules, rapidly expanding the pools of top-rated safe-haven debt and transforming global bond markets.
The agreement led to the biggest weekly sell-off in 10-year German Bunds since the 1990s, pushing the yield over 40 bps higher to 2.90% in the past week. That yield would fall to 2.50% at end-May and 2.65% in a year, poll medians showed, sizable upgrades from the 2.35% and 2.31%, respectively, predicted last month.
"The watershed event in Germany last week means U.S. yields are going to start to compete with some of the global yields rising for good economic reasons," said Khanduja.
