HSBC raises Treasury yield target after Fed stance

The expectations of the Federal Reserve that the US economy will continue to expand and will need additional increases in interest rates to combat inflation led to HSBC to raise its year-end forecast for the return of Treasury bond 10 years from 3% to 3.5%, the bank’s strategists wrote in a note on Thursday.

“At a time when the Federal Reserve maintains its aggressive stance supported by recent GDP data, there is pressure for short-term bond yields to remain elevated, and this affects the entire curve”wrote the firm’s analysts, led by Steven Major, global head of fixed income.

The firm expects the return on the benchmark 10-year notes to close 2024 at 3%. The day before it reached its highest level in 16 years, 4.49%, while the yield on two-year, rate-sensitive paper reached its highest level in 17 years, 5.2%.

Bond returns move in the opposite direction to prices.

The Fed left rates unchanged on Wednesday, as markets expected. However, those responsible for monetary policy reinforced their aggressive stance by announcing the forecast of a new rate hike for the end of the year and much more restrictive monetary policy forecasts until 2024 than the markets had anticipated.

Despite the Fed’s hawkish stance, there is reason to believe global central banks are closer to cutting rates than markets now expect, Capital Economics strategists wrote in a note Thursday.

The firm expects 21 of the world’s 30 major central banks to cut rates around this time next year.

“Despite all the talk of ‘higher for longer’, we believe the global monetary policy tightening cycle is coming to an end.”the firm wrote.

Source: Reuters