"Turbulent Times: Analysts Predict Rise in U.S. Treasury Yields Amid Risk of Default"

 

In the next month, U.S. Treasury yields are expected to rise significantly, according to a Reuters poll of 28 analysts. The U.S. government has about three weeks to reach a deal on raising the $31.4 trillion U.S. debt limit, which has caused turbulence in the bond markets. While previous episodes of debt ceiling brinkmanship have been resolved with last-minute deals, the current political climate and widening political divisions have raised concerns that a default could occur this time.

Half of the respondents in the Reuters poll stated that the risk of a default was higher this time compared to previous stand-offs, while the remaining respondents believed the risk was the same. This uncertainty surrounding the debt ceiling has added pressure to an already turbulent Treasury market this year. The most sensitive to debt ceiling jitters, the cost of insuring against a U.S. sovereign default, and yields on short-dated Treasury bills have surged in recent weeks.

The poll also showed that U.S. 2-year and 10-year yields are expected to rise over the next month by around 20 and 10 basis points, respectively. Respondents predicted that the 10-year yield, currently at 3.38%, would trade within a range of 3.30%-3.60% over the next month. This uncertainty is reflected in the MOVE index, the most widely-followed indicator of bond market volatility, which is currently around 45% higher than its long-term average.

Looking further ahead, analysts expect the U.S. 2-year note yield to fall sharply to 3.30% from the current 3.86% by April 2024, still slightly higher than the 10-year note yield. Financial markets are pricing in at least 50 basis points of interest rate cuts from the U.S. Federal Reserve by the end of 2023. However, the Fed has pushed back on speculation that it will soon consider cutting rates as inflation still runs more than twice the 2% target.

Steven Ricchiuto at Mizuho Securities noted that the key question for the second half of this year is whether the bond market is correct in assuming the Fed will be forced to reverse policy and cut rates several times by early 2024. However, he believes that the Fed's "higher for longer" strategy is more realistic.