JPMorgan's upward revision of long-term US Treasury yield forecasts has become the central topic in this week's Wall Street interest rate outlook debate. Multiple major institutions have released reports, sharing their views on the Federal Reserve's diminished credibility, rising inflation risk premiums, and the trajectory of the yield curve, with a mix of both disagreement and consensus.
The Federal Reserve decided to keep interest rates unchanged last week, followed by a speech from Chair Walsh, which sparked widespread market doubts about the Fed's credibility in fighting inflation. In a July 31 report, JPMorgan strategists, including Jay Barry, noted that the market reaction—falling short-end yields and rising long-end yields—"reflects market concerns about the Fed's credibility." Consequently, JPMorgan economists have moved their forecast for the Fed's first rate hike forward from the second half of next year to this December.
Affected by a sharp drop in oil prices, the yield on the 10-year US Treasury fell about 5 basis points on Monday to around 4.68%. However, this short-term volatility has not changed the institutions' overall view of rising long-end yields. Most institutions believe that rising inflation expectations and expanding term premiums will continue to pressure long-term rates, and the trend of further yield curve steepening is unlikely to reverse in the short term. The 30-year yield rose to 5.28% last Friday, its highest level since 2007, before edging back to around 5.22% on Monday.
JPMorgan: Upgrades Forecasts, Recommends Curve Steepener Trades
JPMorgan has raised its year-end forecast for the 10-year US Treasury yield from 4.70% to 4.85% and its 30-year yield forecast from 5.20% to 5.40%. The report stated, "These adjustments are mainly due to our renewed shift towards a bullish view on inflation breakevens and an expectation that term premiums may also rise." Based on this assessment, JPMorgan advises investors to position for a further widening of the 2-year to 10-year spread to capture the continued steepening of the yield curve.
Barclays: Long-Term Rates Have Room to Rise, Curve Steepening Potential Remains
Strategists at Barclays, including Anshul Pradhan, also believe long-term rates have room to rise, citing a strong economy that has pushed estimates of the neutral rate to the 1.5% to 2% range, and the potential for markets to price in a higher inflation risk premium, which would undermine any positive investor reaction to the Fed's reaffirmation of its commitment to price stability. Barclays also notes that the current 2s30s curve remains significantly below its long-term average of 150 basis points, indicating room for further steepening. The bank continues to recommend paying the 5-year forward 5-year rate, emphasizing that "unless Chair Walsh commits to starting a rate hike cycle—which would be a stark contrast to his previous stance of providing no forward guidance—long-term yields will still need to find their own direction within the evolving economic outlook."
Goldman Sachs and Morgan Stanley: Tactically Bullish on Steepening, but Advocate for Precise Hedging
Goldman Sachs strategists, including George Cole and William Marshall, stated in a July 31 report that they prefer to express expectations of higher risk premiums in the yield curve through cross-market trades, but they are cautious about the sustainability of a bear steepening trend. The report noted, "We believe a broad-based bear steepening is more of a tactical risk than a structural one. It is more reasonable to hedge against rising yields by establishing directional exposure in the middle of the yield curve." Meanwhile, Morgan Stanley strategists, including Matthew Hornbach and Martin Tobias, maintained their US Treasury 7s30s steepener trade in a report on the same day, but recommended hedging by purchasing a SFRU6 95.9375/95.875 put spread to cover risks from rising expectations of a September rate hike during the release of the next two employment reports and CPI data. The report cautioned that if the August CPI, released on September 11, comes in higher than expected, "it could prompt the market to price in more than one 25-basis-point rate hike before the September meeting."
Bank of America: Recommends 2s10s Flattening Trade, Betting on Fed Credibility Recovery
Bank of America strategist Mark Cabana believes that if the Fed cannot better explain to the market how it will achieve its 2% inflation target, the sell-off in US Treasuries will resume. He described the long-end bond sell-off last Wednesday, which pushed yields to nearly 20-year highs, as a "textbook inflation credibility shock." On that day, Fed Chair Walsh failed to explain to investors how the central bank would curb price increases during his press conference. "It's fine to say you have a strong commitment to achieving 2% inflation, but unless you tell us how you're going to do it, we won't believe you," Cabana said in an interview. "And you can't fool the bond market; it will see right through you." The bank has added a new recommendation to pay the January 2027 FOMC Overnight Index Swap (OIS) to prepare for a Fed that "may want to take a stronger stance on inflation," while continuing to recommend paying the 2-year rate and suggesting a 2s10s curve flattening trade. Bank of America also noted that if long-end Treasury yields remain under pressure, the Fed might attempt to repair its inflation credibility through senior official speeches or media articles in the future.
Scotiabank: Underestimating October Rate Hike Probability, Sees Trading Opportunity
Strategists Boris Sender and Rachel Zheng at Scotiabank present a differentiated view, arguing that the market is currently underestimating the possibility of the Fed taking rate action at the October FOMC meeting. The bank recommends paying the October FOMC meeting while receiving the September and December meetings to capture this pricing bias. Additionally, Scotiabank favors buying the middle of the 2s5s10s butterfly trade to benefit from multiple factors, including potential weakening in non-farm payroll data, unchanged US Treasury issuance guidance, and further policy signals from Fed officials.
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