The epic slide in Treasury yields suddenly unleashed last week by the Federal Reserve forced many Wall Street strategists to jettison days-old forecasts for 2024, but dissent still lingers between bulls and bears.
Bond-market projections for next year that looked pessimistic when they were published in November became untenable as yields slumped following the Fed’s pivot toward cutting interest rates next year. Some already upbeat calls were also completely overtaken by events.
Yet even while many were forced back to the drawing board, major banks are still at odds. TD Securities is among the most bullish on bonds. Bank of America Corp. and Barclays Plc are some of the most skeptical.
The median forecast of strategists at the world’s biggest financial institutions is now for the 10-year US Treasury yield, a benchmark for multiple markets, to fall to 3.98%. That’s hardly far from its level of 3.93% as of Monday’s close, but markedly lower than its yield before the Fed’s pivot: 4.20% — itself down from a 2023 high above 5%.
At the low end, TD Securities thinks the 10-year rate has scope to slump to 3% in a year from now, following 200 basis points of Fed rate cuts beginning in May. Goldman Sachs Group Inc. and Barclays, while capitulating on their views that rate cuts were unlikely before the fourth quarter of next year, forecast yields to end 2024 at 4% and 4.35% respectively.
“Whenever you see that disparate range of estimates, that’s when you know that a trend has come to an end and you’re about to embark on something new,” said Bryce Doty, whose team manages $9 billion in government bond funds at Sit Investment Associates. The Fed’s dovish pivot, Doty added, was “the bell going off telling you we’re at a turning point.”
Others, such as Bank of America, still project the 10-year yield to trade at 4.25% this time next year but concedes that the Fed’s new stance “poses downside risks to our rate forecasts.” Morgan Stanley is at 3.95%, JPMorgan Chase & Co. is penciling in 3.65%, and Citi sees 3.90%.
This time last year, TD and Citigroup were among those most bullish on Treasuries as multiple investors declared 2023 to be the “year of the bond.”
Such forecasts blew up as the economy and inflation proved more resilient than anticipated and a recession was avoided, leading the Fed to spend much of the year extending the biggest series of rate hikes in decades. Contrary to the expectations of most, 10-year yields exceeded 5% in October for the first time since 2007.
Bonds are now on course to narrowly avert a third consecutive annual loss after the economy started to fade and the Fed stopped tightening. That sparked the best month for Treasuries since 2008 in November and a pan-market surge in stocks, credit and emerging markets.