Inflation pressures linger! Wall Street raises its forecast for this year's 10-year U.S. Treasury yield

According to the Zhitong Finance APP, Wall Street analysts made predictions about the 10-year U.S. Treasury yield at the end of 2025 just a few weeks ago, and now, only 15 days later, they have begun to raise these forecasts, reflecting the uneasy sentiment in the bond market.

On Wednesday, the 10-year Treasury yield fell to 4.653%, marking the largest single-day drop since last November. On Monday, the yield closed at 4.802%, the highest level in a year. This decline in yield was due to core inflation data coming in lower than expected. According to FactSet, the core inflation rate for December was 3.2%, below analysts' expectations and down from 3.3% in November.

Although comments from major Wall Street banks on the inflation data have not yet been fully released, the market generally believes that yields may remain high for an extended period. On Tuesday, the interest rate strategy team at Bank of America Securities (including Mark Cabana and Sphia Salim) raised their year-end forecast for the 10-year yield from 4.25% in November to 4.75%.

Economists at Bank of America Securities stated that they believe the Federal Reserve will not cut interest rates further during this economic cycle. This view was expressed after last Friday's employment report for December came in stronger than expected. JPMorgan also raised its year-end forecast for the 10-year yield from 4.25% on November 26 to 4.55%. The bank's global interest rate strategy head, Jay Barry, noted that they expect the Federal Reserve to only cut rates once in June and once in September this year, rather than once each quarter.

Additionally, Barry mentioned that the rise in term premium is another important factor. Term premium is the extra compensation that investors require for investing in long-term bonds instead of short-term ones. This increase in premium is closely related to market expectations of increased government debt issuance, especially considering that the tax cut policies planned by the Trump administration may lead to a rise in Treasury supply.

Although the inflation report on Wednesday had limited direct impact on yields in the short term, overall inflationary pressures are still increasing. In December, overall prices rose 2.9% year-on-year, up from 2.7% in November. Month-on-month, prices increased by 0.4%, also higher than November's 0.3%.

Henry Allen, a macro strategist at Deutsche Bank, stated that rising commodity prices are pushing inflationary pressures. For example, corn futures prices have reached a new high since December 2023, and Brent crude oil prices have also surpassed $80 per barrel for the first time in three months.

Moreover, the tariffs threatened by President-elect Trump could further drive up prices. Research institutions generally believe that these policies will increase inflationary pressures.

Deutsche Bank predicted in its outlook report on November 15 last year that the 10-year Treasury yield would peak at 4.75% in the first half of 2025 and maintained this forecast. However, the bank also noted that the rise in term premium could keep yields at 4.75% or higher.

Jim Bianco, president of Bianco Research, has a more pessimistic forecast for yields. He expects the average level of the 10-year Treasury yield in the future to reach 5.23%, higher than the peak in 2023. This prediction is based on the assumption that long-term inflation rates will reach 3% Another analyst, Peter Tchir, the head of macro strategy at Academy Securities, raised his short-term yield target to 4.75% on January 5, citing the massive issuance of government bonds.

Although the decline in yields on Wednesday seemed favorable, market observers generally believe that this situation may not last long