Having spent most of 2023 considerably over 4.0%, benchmark 10-year yields fell into a tailspin towards the end of the year as markets aggressively priced in a series of Fed interest rate cuts starting in March.
Currently at 4.15%, the 10-year yield tumbled ahead of the U.S. central bank's policy meeting at the end of last month in anticipation of a signal it would start reducing borrowing costs soon.
Yet the Fed provided no such signal, forcing markets to temper expectations yet again, with interest rate futures now pricing in about a 55% chance for the first rate cut to come at the April 30-May 1 policy meeting - versus nearly 90% for a cut at the March meeting at the start of the year.
Current rate futures pricing reflects over 110 basis points worth of easing this year, still considerably higher than the Fed's own expectations of 75 basis points and the median 100 basis points expected by economists in a separate Reuters poll taken three weeks ago.
Yet median forecasts from bond strategists in the Feb. 7-12 Reuters poll predicted the 10-year note yield to trade roughly steady in one and three months, before falling by 28 basis points to 3.87% by the end of July and another 12 basis points to 3.75% in a year.
"Much of the focus was on (Fed) Chair (Jerome) Powell's explicit push-back on expectations of a March cut ... but the Fed moved to a genuinely neutral bias, which is a step in the dovish direction," fixed income strategists at J.P. Morgan wrote in a recent research note.
Nearly two-thirds of those polled who answered an additional question, 22 of 34, said the greater risk to their six-month 10-year note yield forecast was that it would be higher than they predicted rather than lower.
"We now see risks to the recent 10-year yield range shifting higher with strong U.S. data. Clients have appeared willing to 'buy the dip,' but continued strong data may test their conviction," wrote Mark Cabana, head of U.S. rates strategy at Bank of America.
A roughly 40%-strong minority of poll respondents, 17 of 45, many of them the Fed's primary dealer banks, predicted the yield to be 4.0% or higher by the end of July.
"Markets have the funds rate getting into the threes in a couple of years, and that's what's going to give them a bit of indigestion and prevent an aggressive drop in yields - the fact that those expectations may be overly optimistic," said Robert Tipp, chief investment strategist at PGIM Fixed Income.
The interest-rate sensitive 2-year Treasury note yield, currently at about 4.47%, will fall about 60 basis points to 3.92% by the end of July, and then by a further 45 basis points to 3.47% in a year, the poll found.
(Reporting by Sarupya Ganguly; Polling by Pranoy Krishna and Vijayalakshmi Srinivasan; Editing by Ross Finley and Paul Simao)
By Sarupya Ganguly
