Deutsche Bank AG interest rate strategists have increased their year-end forecast for the 10-year U.S. Treasury yield, citing the expectation that Federal Reserve officials, now led by Chair Kevin Warsh, have concluded their rate-cutting cycle.
A team of strategists, including Matthew Raskin and Steven Zeng, now project the 10-year Treasury yield to peak at 4.70% by December. This is higher than the level of approximately 4.45% observed on Friday, which was also the bank's previous year-end forecast.
In a report issued on Friday, the strategists stated, "This change reflects our revised baseline view that the Fed has finished cutting rates and will hold rates steady at the long-run nominal neutral rate over the forecast horizon."
This adjustment aligns with the market's ongoing hawkish reassessment of the Fed's policy path in the coming months, driven by the war in Iran pushing up energy prices and disrupting the inflation outlook. Since the conflict began in February, the 10-year Treasury yield has risen by about 50 basis points.
Raskin, Zeng, and their colleagues noted, "Relative to this policy baseline, the risks are skewed toward rate hikes." They added, "Our outlook for duration exposure is modestly bearish."
Current swap pricing indicates roughly a 55% probability of Fed policymakers implementing a rate hike by year-end. However, Deutsche Bank's view is that the Fed will maintain borrowing costs stable for the foreseeable future.
The analysts highlighted that risks to Deutsche Bank's revised forecast include a potential bursting of enthusiasm surrounding artificial intelligence technology, a significant labor market downturn related to AI factors, and the possibility of a substantial decline in forward oil prices.
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