HSBC expects the yield on 10-year Treasury bonds to reach 4.65% by the end of the year, rather than 6%. On Monday, the yield fell to 4.951%, continuing its decline from a 19-year high of 5.041% last week. The reasons were falling oil prices and hopes for easing tensions in the Middle East, which calmed markets and led to a sharp change in sentiment from the previous "hawkish" stance.
The bank has raised forecasts across the Treasury yield curve. The year-end forecast for two-year notes has been increased to 4.20% from 3.85%, and for 10-year notes to 4.65% from 4.30%. HSBC still expects the Federal Reserve to keep rates at their current level until 2027 as the base scenario.
HSBC indicated that the odds of a rate hike in the current cycle have become almost equal, describing the internal debates of the Federal Open Market Committee as being "on the edge." The bank attributed comments by Fed Chairman Kevin Warsh at Jackson Hole for easing the summer term premium. Persistent fiscal deficits, it said, will exert pressure on the yield curve going forward. Additionally, HSBC states: "The increase in asymmetric skew in dual mandate risks means the distribution of potential outcomes has shifted, and this is likely to maintain pressure on short-end yields even if the Fed does not tighten policy soon."
Not everyone agrees with the proposed direction. Matt Maley of Miller Tabak calls 4.8% a more relevant test and warns that a sustained break above this mark could impact other assets. Deutsche Bank data on past tightening cycles suggests that a move to 6% is more likely by 2027 than in the near term. iCapital's forecast of 5.3% is even higher, with Dan Suzuki pointing to oil, not the Fed, as the driver. The pessimistic ZeroHedge scenario asserts that 6% will be reached regardless of how orderly the path appears. Forecasts are centered between 4.65% and 5.3%, making a break above 4.8%, rather than a jump to 6%, the nearest signal to watch. Business activity index (PMI) data, unemployment claims, and several Fed speeches this week should test which camp is right.
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