Anshul Pradhan and Stephen Stanley both saw the current US bond market coming. They just don’t agree on where it’s going.
Pradhan, the head of US rates strategy at Barclays Capital, and Stanley, the chief economist at Santander US Capital Markets, have been two of the most accurate Wall Street bond forecasters surveyed by Bloomberg so far this year. Each predicted roughly how much Treasury yields would rise during the first quarter — and broke with others by expecting rates to stay up through the end of June as sticky inflation kept the Federal Reserve on hold.
But the two are now parting ways.
Pradhan says that 10-year yields, currently around 4.5%, will likely push higher — possibly re-testing the 16-year peak of 5% that was hit in October — as the US economy keeps powering ahead. Stanley, by contrast, says the bond market has turned the corner: He expects the benchmark yield to hold steady through June and drift down to 4% by December, anticipating that the Fed will have leeway to start taking its foot off the brakes.
The divergence underscores the uncertainty that has continued to grip the financial markets even 10 months after the US central bank wrapped up its most aggressive rate-hike cycle in four decades.
That pause had left traders confident by late last year that the central bank would ease policy sharply this year. But those bets were upended by the surprisingly resilient economy and inflation that’s remained stubbornly elevated, driving bond yields back up and exerting a drag on the equity market.
The debate now centers on whether that reset has primed bonds for a rebound — or left them still vulnerable to another leg downward if policymakers disappoint by not cutting rates at all. Late last week, bonds rallied after payroll growth slowed and unemployment ticked up, fanning bets on a late-year easing.
To Barclays’ Pradhan, though, those wagers are premature — just as they were in December, when bond yields were sliding on anticipation that such cuts were imminent this year. He told clients to sell 10-year notes in March, when the yield briefly dropped toward 4%, correctly predicting it would head higher again. He and his colleagues urged clients to stay short 10-year Treasuries after the payroll figures, saying markets are taking “too much signal from the soft data.”
He said there’s still room for yields to edge up, citing a “virtuous feedback loop” of job growth and increased consumer spending that’s been fueling the economy. Pradhan raised his yield forecast in mid-April, estimating that the 10-year rate will be at 4.7% by the end of June and 4.6% by year-end, up from his prior forecasts of 4.3% and 4.35%, respectively. He said that he won’t be surprised if the 10-year made a run to 5% between now and then.
“The US economy is going to be far more resilient than what the consensus is expecting,” Pradhan said in an interview. “The progress on inflation is going to be slower than what most people are forecasting.”
Santander’s Stanley was also among those who had expected the economy to keep surprising to the upside this year, and he had predicted it would keep the Fed on hold until November even as traders piled into bets that they’d begin cutting in March. “I was much more hawkish on the Fed than most,” Stanley said.
Where he differs from Pradham is that he sees the risks more balanced now that the market has sharply dialed back its easing bets. He is sticking to his forecast that the Fed will cut in November and December, but acknowledged that this call is “in a little bit of jeopardy” following the recent run of hot inflation prints.
Still, with the Fed unlikely to resume raising rates, he thinks Treasury yields are likely to fall in the second half of the year as the Fed edges closer toward a pivot.
“Unless you come to the view that the Fed might actually hike rates, there’s probably not much more of an adjustment that needs to be made,” said Stanley.
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