Fed terminal rate to reach just under 5%, said bond strategists: Reuters poll

The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger

BENGALURU, Nov 9 (Reuters) - Sovereign bond yields are likely to remain elevated in the near term and be at higher levels in a year than predicted last month, according to a Reuters poll of fixed income strategists who expected a terminal federal funds rate just under 5%.

With scant evidence of sustained cooling in inflation, global central banks are unlikely to deviate yet from their current tightening paths. If any, the bias was for them to take interest rates higher or keep them at elevated levels for longer.

In a news briefing last week, Fed Chair Jerome Powell cautioned against prematurely discussing a pause in hiking rates in the face of persistently high inflation. He also said the "ultimate level" of the central bank's benchmark policy rate was likely to be higher than previously estimated.

The median forecast from over 30 bond strategists who answered an additional question in the Nov. 4-9 poll put the terminal fed funds rate at 4.75%-5.00%, with one forecast as high as 5.50%-5.75%.

That median view was one quarter percentage point higher than what economists expected in a separate Reuters poll, but slightly lower than what interest rate futures were pricing in.

A strong 74% majority, 23 of 31, expected the terminal rate to be reached by end-Q1 2023. While six said Q2, two chose Q4 of next year. The bulk of responses were taken before any results from the U.S. midterm elections were available.

"Global central banks might have a 'ways to go' before pausing. We expect bonds to retain a bearish bias this year as inflation remains the dominant theme," noted Subadra Rajappa, head of U.S. rates strategy at Societe Generale. "Higher for longer argues in favour of flatter curves, especially as recession risks continue to rise."

Reporting by Hari Kishan; Polling by Swathi Nair and Sujith Pai

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