Written by Salpiya Ganguly
BENGALURU (Reuters) – U.S. Treasury yields are expected to rise sharply over the next month, analysts surveyed by Reuters said, raising the risk of a U.S. default on the debt ceiling. Opinion is divided on whether it is higher than the opposition or the same.
President Joe Biden and leading members of Congress have about three weeks left to reach a deal on the $31.4 trillion increase in the U.S. debt ceiling that has soared bond market volatility.
Half of 28 respondents in a Reuters poll from May 5 to 11 said the risk of default was higher this time around than in previous debt ceiling brinkmanships. The rest said the risks were the same.
After a last-minute deal, which has typically been the case in past conflicts, 2011 saw the first downgrade of America’s first-tier credit rating. But analysts warned that the current situation could become even more risky as political rifts widen.
Meanwhile, US Treasury yields are expected to rise on heightened fears of default. Yields on two- and 10-year U.S. Treasuries are expected to rise by about 20 and 10 basis points, respectively, over the next month, according to the survey.
When asked about the range in which the 10-year bond yield, currently at 3.38%, will trade over the next month, the median range of strategists surveyed was between 3.30% and 3.60%. Individual responses ranged from a minimum of 3.0% to a maximum of 4.0%.
“This week, the Treasury Secretary’s June 1 deadline for the debt ceiling has pushed the risk balance decisively negative, while stress in the regional banking sector continues,” said U.S. rates strategist Phoebe White. It weighs on the market,” he said. at JP Morgan.
“A short-term solution to buy time until the fall might be an option, but I don’t know if this kind of quick fix would get enough votes.”
Uncertainty over whether the debt ceiling hike will be delivered on schedule and persistent concerns over midsize U.S. banks have added pressure to an already turbulent Treasury market this year.
Yields on short-term Treasury bills, the most sensitive to debt ceiling movements, and the cost of insurance against U.S. sovereign defaults have both surged in recent weeks.
The MOVE index, the most widely watched indicator of bond market volatility, is currently about 45% higher than its long-term average.
Looking further ahead, the U.S. 2-year yield is expected to drop significantly to 3.30% by April 2024 from its current 3.86%, still slightly below the 10-year yield. expensive.
Financial markets are pricing in at least 50 basis points of rate cuts by the U.S. Federal Reserve through the end of 2023, suggesting a resilient economy and strong labor market will plunge into recession this year. are doing.
But after the Fed last week hinted it would pause one of its most aggressive tightening policies in history, it will consider a rate cut soon as inflation remains more than double its 2% target. I pushed back the observation that it might be.
“The key question in the second half of the year is whether the bond market is correct in its assumption that the Fed will be forced to change policy and cut rates multiple times by early 2024,” said Steven Richoud of Mizuho Securities.
“By contrast, our analysis suggests that the Fed’s ‘longer and higher’ strategy is more realistic.”
(Reported by Sarupya Ganguly and Indradip Ghosh, Voted by Milounee Purohit and Mumal Rathore, Edited by Hari Kishan and Paul Simao)
