US Treasury yield forecasts anchored despite rising debt load and inflation concerns

Reuters

6 hours ago

BENGALURU, July 15 (Reuters) - U.S. Treasury yields will trade in a tight range over the coming months, with a strong majority of bond strategists surveyed by Reuters predicting demand for Treasuries lagging an expected deluge of new supply.
President Donald Trump's sweeping tax-cut and spending bill, which cleared its final hurdle in the U.S. Congress earlier this month, is expected to add $3.4 trillion to the nation's $36.2 trillion debt pile, according to the nonpartisan Congressional Budget Office.
Inflation risks from a renewed U.S.-led trade war, which includes Trump threatening a 30% tariff on imports from Mexico and the European Union starting August 1, has also pushed the U.S. "term premium" - the compensation investors demand for holding longer-term bonds - higher.
With net Treasury issuance expected to approach nearly half a trillion dollars this quarter a rising risk premium makes it considerably harder to finance those expenses at higher interest rates.
Nearly 77% of bond strategists, 23 of 30, responding to a July 10-15 Reuters survey said demand for U.S. Treasuries would lag supply slightly both this quarter and the next.
Those respondents generally held a higher yield view than the wider monthly panel of 71 bond yield forecasters. Most bond strategists in Reuters surveys over the past year have repeatedly overestimated declining yields.
"I think rates will over time structurally drift higher until either they're too restrictive in the real economy or the administration...has to rein in spending in order to right-size the budget," said Connor Fitzgerald, fixed income portfolio manager at Wellington Management.
"While the government will be fine financing all the supply they need it will, over time, come at a slightly higher risk premium or cost."
Sustained expectations the U.S. Federal Reserve will cut interest rates is one main reason strategists expect the benchmark 10-year Treasury yield , currently 4.42%, to roughly hold that level in coming months, falling a bit to 4.40% by end-September and 4.30% by year-end.
"We think we're going to be in a range-trade for the next few months, maybe a marginal drop by year-end - not a huge move. There's a limit to the sell-off in the long end, but then there's a limit to a rally and lower yields too," said Jason Williams, director of U.S. rates research at Citi.
"There are certainly risks the unemployment rate can go higher and though we haven't seen much tariff-led inflation yet there are definitely risks tariffs will cause a one-time price shift and that really complicates the Fed's reaction function."
U.S. consumer prices likely rose sharply in June, potentially signaling the start of a long-anticipated tariff-driven rise that could limit how much the Fed can cut rates.
That would further strain the already-tense relationship between Trump and Fed Chair Jerome Powell.
"A key risk is the impact inflation will have on consumer spending and the extent to which firms will pass that on. If firms are unable to absorb the cost pressures and pass them off to consumers...that would be a major factor in driving an economic slowdown," said Matthew Vegari, head of research at Clearwater Analytics.
The interest-rate-sensitive 2-year Treasury yield , currently 3.90%, will decline 27 basis points to 3.63% at year-end, survey medians showed.
If realized, that would steepen the yield curve, widening the spread with the 10-year yield to 67bps from around 50bps.