US Treasury yields are predicted to fall to 2% as concerns about a possible recession in the world's largest economy grow. Analysts have forecasted that benchmark 10-year yields could drop as low as 2% by early next year if the US experiences a more severe economic downturn than anticipated. Investors are increasingly purchasing sovereign bonds amid warnings of an impending American recession, with some experts stating that the odds of such an event occurring are "pretty darn high."
"The market is sending a clear message that the Federal Reserve is fighting inflation and any selloff in Treasuries should be seen as a buying opportunity," said John Smith, chief economist at XYZ Investment Firm. However, bond bulls may face disappointment if inflation proves more stubborn than expected, potentially forcing the Fed to maintain its hawkish stance.
On Thursday, Treasury yields fell following the Federal Reserve's latest interest rate hike of 25 basis points. The yield on the 2-year Treasury dropped by over seven basis points to reach 3.8644%, while the 10-year treasury experienced a decline of over three basis points and was trading at 3.3674%. It should be noted that yields and prices tend to move in opposite directions.
In Europe, both euro and German bond yields also decreased after Thursday's European Central Bank (ECB) decision to raise its key interest rate by another quarter percentage point (bps). Germany’s ten-year bond yield remained relatively flat at around 2.255%, while Italy’s benchmark borrowing cost declined slightly down to reach 4.179%. In response to this news, STOXX Europe's broadest equity index maintained losses and was last recorded down by approximately 0.9%.
The ECB raised its key interest rate close to a fifteen-year high—up from previous rates—reaching up-to-date figures of roughly 3.25%. In response, the yield on the 10-year German bund fell from 2.282% down to 2.262%, while the euro declined by approximately 0.4% to $1.1014.
"The ECB's latest interest rate hike is a reflection of their efforts to slow down what has become an aggressive campaign against inflation," commented Jane Doe, senior economist at ABC Financial Group. Money markets have adjusted their expectations for future interest-rate hikes and now predict that rates will peak at around 3.70% by September.
Moreover, the ECB Governing Council announced its intention to discontinue reinvestments under its Asset Purchase Program as of July next year—a decision made in light of recent shifts within both US and European economies alike.