According to Yahoo News, UBS has predicted that the 10-year Treasury yield will drop to 3.5% by the end of 2024, down from about 4.3% currently, as the Federal Reserve is expected to implement two to three interest rate cuts next year. The bond rally is anticipated to continue into 2024, with debt markets benefiting from dovish Federal Reserve monetary policy.
Market expectations of a central bank pivot have already boosted Treasury prices, partially reversing a massive sell-off that began in 2020 and continued until October. Despite the strong run, UBS believes that bonds can rally further next year. The Fed is likely to have reached the end of its hiking cycle, given the recent cooldown in inflation and the easing of the labor market. A drop in excess savings next year should continue to put downward pressure on inflation, allowing the Fed to lower rates.
While markets are pricing in odds that Fed rate cuts could start as soon as March, UBS predicts they are more likely to begin in July. The decline in yields might not happen steadily, especially as Fed officials have recently sent mixed signals about how monetary policy will unwind. UBS also expects the Fed to intervene in the bond market to restore stability if necessary, and continues to recommend high-quality bonds with a 1–10-year duration, particularly the five-year segment.
Alex
