Inflation pressure looms! Wall Street raises its forecast for the yield on 10-year US Treasury bonds this year.

Wall Street analysts just made predictions for the yield on the 10-year US Treasury bond by the end of 2025 a few weeks ago, and now, just 15 days later, they have already started raising those predictions, showing anxiety about bond market volatility. On Wednesday, the 10-year Treasury yield dropped to 4.653%, marking the largest single-day decline since last November. On Monday, the yield closed at 4.802%, the highest level in a year. This decline in yield is attributed to core inflation data coming in lower than expected. According to FactSet data, core inflation in December was 3.2%, lower than analysts' expectations and lower than November's 3.3%. Although major Wall Street banks have not fully disclosed their comments on inflation data, it is widely believed in the market that yields may remain elevated for some time. On Tuesday, Bank of America Securities' rate strategy team (including Mark Cabana and Sophia Salim) raised their year-end forecast for the 10-year yield from 4.25% in November to 4.75%. Bank of America economists stated that they believe the Federal Reserve will not further cut interest rates in this economic cycle. This view was expressed after the stronger-than-expected December jobs report last Friday. JPMorgan also raised its year-end forecast for the 10-year yield from 4.25% on November 26 to 4.55% last Friday. Jay Barry, the bank's global rate strategy director, noted that they expect the Fed to only cut rates twice this year, in June and September, rather than once every quarter. Barry also mentioned that the rise in term premia is another important factor. Term premia is the additional compensation investors demand when investing in long-term bonds rather than short-term bonds. This increase in premia is closely related to market expectations of increased government debt issuance, especially considering the Trump administration's planned tax cuts could lead to higher bond supply. Although the inflation report on Wednesday had a limited direct impact on yields in the short term, overall inflation pressure is increasing. Overall prices rose by 2.9% year-on-year in December, higher than November's 2.7%. On a monthly basis, prices rose by 0.4% in December, also higher than November's 0.3%. Henry Allen, macro strategist at Deutsche Bank, stated that the rise in commodity prices is boosting inflation pressure. For example, corn futures prices reached a new high since December 2023, and Brent crude oil prices exceeded $80 per barrel for the first time in three months. Furthermore, the tariffs threatened by President-elect Trump could further push prices higher. Research institutions generally believe these policies will increase inflation pressure. In its outlook report on November 15 last year, Deutsche Bank predicted that the 10-year Treasury yield would peak at 4.75% in the first half of 2025 and maintain this forecast. However, the bank also indicated that the rise in term premia could cause yields to stay at 4.75% or higher. Jim Bianco, President of Bianco Research, has a more pessimistic forecast for yields. He expects the average yield on the 10-year Treasury bond in the future to reach 5.23%, higher than the previous highest in 2023. This forecast is based on the assumption of a long-term inflation rate of 3%. Another analyst, Peter Tchir, macro strategy director at Academy Securities, raised his short-term yield target to 4.75% on January 5 due to the significant government bond issuance. Although the decline in yields on Wednesday may seem positive, market observers generally believe that this situation may not last long.