The most accurate US bond forecasters of 2023 say the strong year-end rally won’t stretch into 2024.
Goldman Sachs Group Inc.’s Praveen Korapaty, the bank’s chief interest-rate strategist, and Joseph Brusuelas, the top economist at tax consulting firm RSM, both predict that the 10-year Treasury yield will climb to about 4.5% by the end of next year. BMO Capital Markets’ Scott Anderson sees it ending 2024 only little changed from where it’s been hovering — around 4.2%.
The three were the only ones among the 40 economists and strategists surveyed by Bloomberg who correctly predicted that the benchmark Treasury rate would rise over 4% to end this year near its current level.
They now say traders are falling into the same trap they did heading into the last two years: underestimating the economy’s strength and the likely persistence of inflation pressures. Signs of a slowdown in both helped drive the US bond market last month to its biggest gain since the mid-1980s, with yields tumbling sharply on speculation the Fed will cut its benchmark rate by over a full percentage point in 2024, starting in the first half of the year.
“Markets are pricing too much policy easing too soon,” said Korapaty.
The calls aren’t particularly worrisome, given that they would mean the debt market would effectively steady after being hammered by losses in 2021, 2022 and most of this year. But they highlight the risk that markets are prematurely dismissing the chance the Fed will keep rates elevated until inflation is safely reined in. The average forecast of those surveyed by Bloomberg is that 10-year yields will slide to 3.9% by the end of 2024.
BMO’s Anderson said the low rates of the pre-pandemic era are unlikely to return soon due to economic shifts that have increased the so-called neutral interest rate, or the level that doesn’t affect the pace of growth. That means policymakers would need to keep rates higher than they once did just to avoid stimulating the economy. The Fed concludes its next meeting Wednesday and may provide insight into where it’s headed.
“Our longer-term forecast on the Fed over the next five years is that the Fed funds rate won’t be moving back down to pre-pandemic levels anytime soon,” he said.
With inflation remaining above the Fed’s 2% target and few signs of a recession in sight, Goldman Sachs’s economists see a half-point cut by the Fed next year, starting in the third quarter. That’s roughly half as much as the futures market has been pricing in.
While Korapaty isn’t ruling out the risk of an economic contraction, he said there’s a slightly bigger risk that yields may rise above his base-line scenario of 4.55% if inflation prove sticky or the spreading adoption of artificial intelligence leads to a productivity boom.