Wall Street changed its voice overnight! KKR expects interest rates to continue “higher and longer” until 2029, betting that 10-year US Treasury yields will break 5.1% by the end of the year

The Zhitong Finance App learned that the US private equity firm KKR raised its forecast for long-term US bond yields and stated that it expects the Federal Reserve to keep the benchmark interest rate higher than previously anticipated. The reason is that Federal Reserve Chairman Walsh is concerned about continued high inflation.

KKR expects the 10-year US Treasury yield to close at 5.1% at the end of this year, higher than the 5.0% forecast, and close at 4.9% by the end of 2027, higher than the 4.7% forecast previously. KKR expects the Federal Reserve to raise interest rates again in December, followed by another rate hike in March next year; the company currently expects interest rates to remain at these levels until early 2029, while the previous forecast was until 2028.

A team led by Henry McVey, the company's head of global macro and asset allocation, wrote, “We still believe that in an environment of high nominal growth, huge fiscal deficits, and continued capital competition, investors with long curves will demand a considerable term premium.”

After the interest rate hike on Wednesday, traders increased their bets on further interest rate hikes by the Federal Reserve. Market pricing suggests that there will be another 25 basis point rate hike three times over the next 12 months. Although Walsh was careful not to commit to any future action, he reiterated his dissatisfaction with the trend of inflation and emphasized the central bank's commitment to price stability.

The KKR team said that the Federal Reserve no longer expects inflation to fall back to the 2% target by 2029. In our view, moderate restrictive interest rates, combined with lingering inflation and resilient nominal growth, all support the policy stance that interest rates are 'higher and longer'.”

Wall Street collectively turned hawks, betting that the Fed's “rate hike is not over”

The Federal Reserve passed an interest rate hike of 25 basis points with a full vote on Wednesday, raising the federal funds rate target range to 3.75%-4.00%, the first rate hike since July 2023. Chairman Walsh called the action “removed a dose of easing” and reiterated that inflation was “too high and has continued for too long.” After the meeting, Wall Street's major investment banks almost unanimously raised their expectations for subsequent austerity. The only differences were the pace and magnitude.

The most aggressive one is Bank of America's Global Research Division. The bank expects the Federal Reserve to raise interest rates by 25 basis points each in October and December, that is, add 50 basis points during the year, and the year-end interest rate will rise to 4.25%-4.50%. It is the only major bank that is expected to raise interest rates twice during the year.

Goldman Sachs is also betting on October and is expected to add another 25 basis points to 4.00%-4.25% during the year. The bank previously believed that the current round of austerity had come to an end after the September rate hike. The reason was that the bitmap, the increase in neutral interest rates, and statements such as “only a certain degree of easing” by Walsh were more hawkish than expected.

J.P. Morgan Chase, Morgan Stanley, Nomura, HSBC, Barclays, Deutsche Bank, BNP Paribas, Macquarie, and UBS expect the next rate hike to fall in December, with a year-end interest rate range of 4.00%-4.25%.

After the meeting, Michael Gapon, the chief US economist at Morgan Stanley, raised the annual forecast to three interest rate hikes, including this one. He said bluntly: “If you don't even think your policies are restrictive, and oil prices won't fall by themselves, then you have work to do.” Citi became a minority and maintained the forecast of not raising interest rates during the year. Interest rates are expected to remain at 3.75%-4.00%.

Cross-agency views also point to interest rates being “higher and longer”

James Eggelhoff, chief US economist at BNP Paribas, said that this year's two rate hikes “are probably just the beginning of a long cycle of austerity.” Gregory Peters, chief investment officer for fixed income at Prudential, said that unless the inflation data changes, “it is difficult to judge that they will not continue to raise interest rates next month.”

It is worth noting that the conference at the end of October is close to the midterm elections, and the timing is sensitive, so more institutions see December as the next operable window to raise interest rates.

The core variables of disagreement are still oil prices and geography: if the energy shock caused by the situation in Iran continues, the path of interest rate hikes may accelerate; if oil prices fall, the current round of action is closer to “preventive interest rate hikes.”

Most institutions believe that Walsh's commitment to fight inflation has moved from statements to action, and that the process of rebuilding the Federal Reserve's reputation has only just begun.