Major Wall Street institutions race to push back expectations for rate cuts! Ahead of key inflation data, U.S. Treasury bonds fell sharply across the board

Ahead of Tuesday’s highly anticipated U.S. April CPI data release, U.S. Treasury prices plummeted across the board on Monday (May 11). Previously, Goldman Sachs and Bank of America became the latest institutions among Wall Street giants to join the ranks of those delaying predictions of a Fed rate cut window last weekend. They both believe that employment and inflation data justify the Federal Reserve maintaining current interest rates for a longer period.

Market data shows that yields on all maturities of U.S. Treasuries rose collectively on Monday. Among them, the 2-year Treasury yield increased by 7.11 basis points to 3.951%, the 5-year yield rose by 7.39 basis points to 4.071%, the 10-year yield climbed by 6.03 basis points to 4.412%, and the 30-year yield increased by 5.17 basis points to 4.986%.

As Iran war impacts the oil market and pushes inflation higher, traders are increasingly betting that the Fed will hold policy steady until 2026 — or even raise rates in early 2027.

This shift has also been echoed by an increasing number of Fed officials — including two who voted against the last policy meeting — who have indicated that the next move could be a rate hike.

Aditya Bhave, head of U.S. economic research at Bank of America, wrote in a report released on May 8, “The data do not support a rate cut by the Fed this year. Core inflation remains too high and is still rising. The strong employment report in April was the last straw, especially considering the hawkish rhetoric from Fed officials.”

Bhave and his colleagues currently expect that the Fed will not cut rates again before July 2027, a shift from their previous forecast of September this year.

Coincidentally, after the April non-farm payrolls data was released last Friday, Goldman Sachs team led by Jan Hatzius also pushed back their expectation for the Fed’s next rate cut from September 2026 to December. They also lowered their forecast for the probability of a U.S. recession in the next 12 months.

Morgan Stanley and Barclays had previously also predicted that the Fed would extend the period of holding rates steady.

Nick Timiraos, a well-known journalist often called the “New Fed Communications Agency,” pointed out that more selling institutions and Fed observers are now removing or delaying their rate cut expectations from their outlooks, including several who changed their forecasts after the April non-farm payrolls data.

The chart below shows Timiraos’s statistics on Wall Street’s major institutions’ expectations for Fed rate changes (note: the chart has not yet been updated to reflect Goldman Sachs’s forecast changes). Timiraos notes that about half of industry insiders now expect no rate cuts this year — and given the inertia of these forecasts, the risk clearly leans toward this group continuing to expand.

However, some other parts of Wall Street — especially economists at Citigroup, including Andrew Hollenhorst, Veronica Clark, and Gisela Young — still expect the Fed to cut rates before the end of the year. They believe that, given the recent months’ sluggish employment and wage growth, traders are underpricing the central bank’s easing expectations.

U.S. Treasury market faces an uphill battle this week

From the market trend, as oil prices rose again on Monday and expectations of a more hawkish Fed increased, Treasury prices further declined and yields rose. By the close of New York trading, the 2-year Treasury yield, sensitive to rate policy, was less than 5 basis points away from the 4% mark.

Trump stated on Monday that the ceasefire agreement with Iran is “teetering,” which has heightened concerns that the ongoing 10-week conflict could reignite. The conflict has resulted in thousands of deaths and disrupted key energy supplies.

During Monday’s first refinancing auction of the quarter — a $58 billion three-year Treasury note sale — investor demand was below expectations, pushing yields higher. The winning bid rate was about 0.5 basis points above the pre-auction trading level. The bid-to-cover ratio was 2.51, the lowest since July.

As part of the Treasury’s quarterly refinancing plan, on Tuesday, the U.S. Treasury will auction $42 billion of 10-year notes, and on Wednesday, $25 billion of 30-year bonds.

Last Friday, the U.S. Labor Department released April employment data showing that U.S. employers added more jobs than expected for the second consecutive month, highlighting the current resilience of the U.S. labor market despite ongoing Middle East conflicts. The Labor Department will release CPI and PPI reports on Tuesday and Wednesday, respectively, with inflation data now a top priority for many investors amid the ongoing U.S.-Iran tensions and Strait of Hormuz blockade.

Bank of America rate strategists pointed out in a client report on Monday that traders are underpricing the risk of a Fed rate hike. They recommended selling 2-year Treasuries and betting that the short end of the U.S. yield curve will underperform the long end.

Currently, median economist forecasts from media surveys show that the overall U.S. inflation rate in April is expected to rise 3.7% year-over-year, up from 3.3% last month. Core inflation, excluding food and energy, is expected to increase by 2.7% YoY.

Matt Hornbach, head of global macro strategy at Morgan Stanley, said in an interview on Monday, “This month’s inflation report will definitely be somewhat hot. We know oil prices fluctuate greatly daily, which could have a significant impact on inflation trends before the end of the year.”

Macro strategist Simon White also pointed out that, “As inflation continues to rise, the focus of discussions in the coming months will inevitably shift to questions such as: How long will inflation stay high? Will there be second-order effects? (If rates are raised) how much will the central bank hike?”

(Article source: Cailian Press)