T. Rowe Price Fixed Income Department CIO: 10-year US Treasury yield may reach 5% within six months

Zhitong Finance APP learned that the U.S. asset management company T. Rowe Price stated that with rising inflation expectations and concerns about U.S. fiscal spending, the yield on the benchmark 10-year U.S. Treasury bond may soon touch a key level. Arif Husain, Chief Investment Officer of the fixed income department at the company, said, "In the next six months, the 10-year U.S. Treasury bond yield will test the 5% threshold, and the yield curve will become steeper." He added that a smaller rate cut by the Federal Reserve is the fastest path for the 10-year U.S. Treasury bond yield to reach 5%.

As of the time of writing, the 10-year U.S. Treasury bond yield stands at 4.130%.

The last time the 10-year U.S. Treasury bond yield touched 5% was in October last year, when market sentiment was clouded by concerns that interest rates would remain high for a longer period. Arif Husain's forecast contrasts sharply with market expectations for a decline in U.S. Treasury bond yields following the Fed's rate cut last month. Strategists currently generally expect the 10-year U.S. Treasury bond yield to fall to 3.67% by the second quarter of next year. If Arif Husain's forecast proves to be correct, the market will face a turbulent repricing. This also highlights the increasingly fierce debate over the outlook for the world's largest bond market after economic data exceeding expectations raised doubts about the Fed's pace of rate cuts slowing down.

As a seasoned market veteran with nearly 30 years of experience, Arif Husain stated that the continuous issuance of bonds by the U.S. Treasury to fill the government deficit is flooding the market with new supply. At the same time, the Fed's efforts to reduce its balance sheet after years of bond purchases have eliminated a key source of demand for government bonds. Arif Husain also stated that the U.S. Treasury bond yield curve may steepen further, as any upward movement in short-term bond yields will be constrained by rate cuts.

It is worth noting that the private banking division of Deutsche Bank had previously stated last month that by September next year, the 10-year U.S. Treasury bond yield would touch 4.05%. This forecast was proven correct in just about a month. Meanwhile, a report released last week by BlackRock Investment Institute pointed out that with the release of new economic data, longer-term U.S. Treasury bond yields are expected to experience two-way fluctuations.

Signs of cracks in the U.S. fiscal situation provide evidence for Arif Husain's views. It is reported that in the 2024 fiscal year ending in September, the U.S. government's budget deficit exceeded $1.8 trillion, marking the third-highest in history The country's debt interest costs have risen to the highest level since the 1990s. However, neither of the two presidential candidates has made deficit reduction a major policy, making US bonds a major risk for market participants.

Arif Husain said that for the Federal Reserve, the most likely scenario is a small rate cut over a period of time, similar to the rate cuts from 1995 to 1998. In this case, potential global economic growth will create a clearer outlook for Fed officials.

Arif Husain also mentioned the possibility of a normal easing cycle, during which the Fed would lower rates to a level closer to the neutral rate, possibly around 3%. He also considered a scenario where the US falls into a recession, which would force the Fed to cut rates more aggressively. He added, "Investors who, like me, think that a recession is unlikely in the near term should prepare for a rise in long-term US bond yields."