US Treasury yield forecasts creep up, but strategists cling to benign inflation view: Reuters poll

By Sarupya Ganguly

BENGALURU, April 9 (Reuters) - U.S. Treasury yield forecasts are only a bit higher than a month ago despite the U.S.-Israeli war on Iran, according to market strategists polled by Reuters who are still putting off making major changes to their longer-term inflation view.

A near-65% peak surge in oil prices since the war started - currently still 36% higher - has stoked fears of a renewed inflation spike and wiped out expectations of Federal Reserve rate cuts this year.

Treasury yields have whipsawed sharply over the past month with each turn in the conflict. The benchmark 10-year yield traded in a 56-basis-point range in March, the widest since April 2025, when U.S. President Donald Trump first announced sweeping tariff plans.

Markets are now trading Trump's ceasefire announcement tied to the reopening of the Strait of Hormuz, though renewed hostilities elsewhere in the region have raised doubts about its durability.

In the April 7-9 Reuters poll, conducted before and after that announcement, a majority of respondents lifted their Treasury yield forecasts from March.

Yet for all that volatility, the benchmark 10-year yield was forecast to trade only slightly below current levels at around the 4.26% mark in three and six months and 4.25% in 12 months.

"Sticky inflation expected to rise at least over the short run should keep long-term yields up," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research.

The rate-sensitive 2-year yield was forecast to decline modestly to 3.70% in three months and 3.55% in six, poll medians showed.

If realised, that would lead to marked yield curve steepening, pushing the spread between 10- and 2-year yields, currently around 50 bps, to 56 bps at end-June, 71 at end-September and 85 in a year.

A steepening yield curve refers to a widening gap between short- and long-term Treasury yields. Prices move inversely to yields.

"Fiscal concerns aren't going anywhere either and will probably come to the forefront even more now given the fact conflicts like these tend to be expensive and need to be funded with Treasury supply," Schwab's Martin added.

Expected heavy Treasury issuance over coming years and no clear deficit-reduction plan will also likely add upward pressure on longer-dated yields.

SPLIT IN INFLATION VIEWS

Still, many strategists are clinging to their views that the inflation bump from the war will be short-lived.

"The overall growth shock should keep rates in check...and keep a sustained lid on upward movement of yields," said Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management. "We think it's going to be more of a bull steepener rather than a bear steepener-type of environment going forward."

"The assumption remains inflation will be transitory in the U.S. economy versus other parts of the globe," Khanduja added.

While several short-term measures of the extra compensation investors demand for inflation risk have risen, longer-term gauges have barely budged.

"The thing that's striking to me about market pricing of inflation is while there are expectations of elevated readings over the next year, it is not expected to persist and carry over into the medium-run and beyond," said Matthew Raskin, head of U.S. rates research at Deutsche Bank and a former New York Fed staffer.

"The inflation risk premium in the Treasury market is at very subdued levels. But I would argue that looks rather low relative to upside inflation risks."

(Reporting by Sarupya Ganguly; Polling by Indradip Ghosh and Debrah Gomes; Editing by Hari Kishan, Ross Finley, William Maclean)