A global rally in government debt has already driven yields past many Wall Street targets for the end of 2024, highlighting how recent market moves have taken analysts by surprise.
When banks began sending out their annual forecasts to clients a month ago, they were broadly united in the view that government bonds would rally next year as interest rates start to fall.
But many forecasts have already been met more than a year early, as bigger than expected falls in inflation and a changed outlook from the US Federal Reserve have persuaded investors to bring forward their bets on rate cuts.
Yields on benchmark 10-year US Treasuries have declined by almost a percentage point since the end of October on rising expectations that the Fed will begin cutting rates as soon as March. Yields move inversely to prices.
“It’s been a very quick move in rates, because the Fed has made a very quick pivot,” said Bank of America rates strategist Meghan Swiber. “It just speaks to how volatile the market has been — and how very conditional it is on our understanding of how the Fed will move.”
Swaps markets are now pricing in six interest rate cuts from the Fed next year, having anticipated just three at the end of October.
Ten-year Treasury yields slipped to around 3.89 per cent on Wednesday — below the 4 per cent or more that Bank of America, Barclays, Deutsche Bank and Standard Chartered, among others, forecast that they would hit by next December.
The median forecast in a November survey of more than 50 analysts for Bloomberg predicted that 10-year Treasury yields would fall to 4 per cent by the end of 2024.
But yields slipped below that level this month as global stock and bond prices rallied in the wake of the Fed’s mid-December meeting, when chair Jay Powell gave his clearest signal yet that rates would be cut and officials forecast 0.75 percentage points of cuts next year.
Luca Paolini, chief strategist at Pictet Asset Management, had a 4 per cent target for the 10-year Treasury yield for the end of 2024. This “was pretty aggressive” when it was first set, he said, adding that “a lot of the gains we were expecting have already happened”.
However, he said he was still confident in his forecast because he saw limited room for sustained declines in yields without evidence of a major slowdown in the labour market.
“It seems like this rally has made everyone relaxed and that’s never a good sign,” said Paolini. “The question is: can inflation go much lower? The consensus seems to be very optimistic, but I think the jury is still out.”
Francis Yared, global head of rates research at Deutsche Bank, said the rally “is maybe starting to be a bit too aggressive” following Powell’s comments. “We’ve probably done as much as we could without evidence of some weakness in the economy,” he added.
Yared said Deutsche Bank had not changed its 4.05 per cent forecast for the 10-year Treasury yield. He noted, however, that the bank had begun to reduce its exposure to shorter-term government bonds on the assumption that their rally had peaked.
Bank of America, which released its year-ahead forecast in November, predicted that the 10-year Treasury yield would decline to 4.25 per cent by the end of 2024. It has so far not changed its view.
More bullish analysts, meanwhile, said the recent rally had vindicated their ambitious forecasts.
“Our 3 [per cent forecast] for the end of 2024 doesn’t look quite as silly today as it did four weeks ago — because four weeks ago I was getting some heat,” said Steven Major, global head of fixed income research at HSBC.
Major said central banks had largely succeeded in their fight against inflation and did not need to maintain higher rates into 2024. “Those people that were talking about an inflation spiral, a wage price spiral, have gone very quiet,” he said.
Goldman Sachs, which had been a major outlier in predicting that US Treasury yields would rise significantly in 2024, revised its outlook following Powell’s dovish comments.
It had originally forecast that yields would rise to 4.55 per cent by the end of 2024, but reduced this figure to 4 per cent “to reflect the Fed pivot”, according to a note on December 15.
Stocks, meanwhile, have also rallied as investors become increasingly confident that interest rates will start falling in 2024. The S&P 500 has outstripped some year-end forecasts, at least temporarily, but analysts remain divided on the index’s long-term outlook.
Some investment banks, including Morgan Stanley and JPMorgan, still predict that the index will decline in 2024.
Goldman Sachs, meanwhile, lifted its end-of-year forecast for the benchmark S&P 500 index from 4,700 to 5,100 — compared with the current level of around 4,775 — following Powell’s dovish commentary, matching some of the most bullish forecasts on Wall Street.