Wall Street expects long-term interest rates to climb higher again. The 30-year Treasury bond yield is expected to return to 5% by the end of the year.

After Jerome Powell's first meeting as the new chair of the Federal Reserve released a hawkish signal, market concerns about the outlook for long-term interest rates in the US have increased. The latest Markets Pulse survey shows that the majority of respondents expect the yield on the 30-year US Treasury bond to rise above 5% by the end of the year, reflecting investors' uncertainties about the persistence of inflation and the Fed's policy path. The survey of 101 market participants shows that 57% expect the 30-year US bond yield to reach or exceed 5% by the end of this year. Previously, due to the soaring oil prices caused by the US-Iran conflict, the yield broke through 5% last month, reaching a near 20-year high. Currently, the yield on the 30-year US Treasury bond is around 4.9%. It is noteworthy that the last time the 30-year US bond yield surpassed 5% was in 2023, when the Fed significantly raised interest rates to cope with high inflation. In addition, after the Trump administration introduced a new round of tariff policies last year, long-term bond yields briefly rose above 5% before falling back. This week, the Fed kept interest rates unchanged, but Powell reaffirmed in a press conference after his first meeting that the Fed will continue to prioritize restoring price stability and explicitly stated that it will not reconsider its 2% long-term inflation target. At the same time, the Fed's latest interest rate projections show that out of the 18 officials, 9 expect to raise rates at least once this year, with 6 expecting at least two rate hikes. This further reinforces the market's expectations for future monetary policy tightening. Analysts believe that the Fed's hawkish stance has somewhat alleviated bond market concerns about "tolerating higher inflation." Dhiraj Narula, US rate strategist at HSBC Securities, stated that Powell's clear defense of the 2% inflation target helps to dispel market concerns about the Fed accepting higher inflation levels, thereby avoiding a loss of control over long-term inflation expectations. However, the market remains concerned that the rise in energy prices caused by the US-Iran conflict is gradually transmitting to the real economy. As businesses pass on higher energy costs to consumers, inflation pressures in the US may continue to remain high in the short term, which also means that long-term bond yields still face upward pressure. Against the backdrop of rising rate expectations, the US dollar has become one of the most favored assets in the market. The survey shows that over 40% of respondents believe that the US dollar will be the biggest beneficiary of the rising rate expectations. With US Treasury yields continuing to rise, global investors' willingness to allocate to US dollar assets has significantly increased. On Thursday, the US dollar continued to rise, marking its largest two-day gain since late March. Jane Foley, head of foreign exchange strategy at Rabobank, said that the hawkish signal from the Fed completely offset the bearish impact on the US dollar from the US-Iran peace agreement. "The US dollar has strengthened due to the hawkish stance of the Fed, overshadowing the pressure from other negative factors," she said. "As long as US economic data continues to show resilience, the US dollar still has room for further gains." Brendan Fagan, a strategist at Bloomberg, also pointed out that in a scenario where economic growth remains robust, "sustained higher rates for longer" combined with upward revisions in inflation expectations form an ideal environment supporting the rise of the US dollar. At the same time, market perceptions of the stock-bond relationship are also changing. The survey shows that investors expect the positive correlation between the S&P 500 index and the yield on the 2-year US Treasury bond to reappear in the remainder of this year, meaning that they are likely to move in the same direction. However, there is still a clear division within the market as to whether stocks will rise or bond yields will fall in the future. Currently, the correlation between the S&P 500 index and the yield on the 2-year US Treasury bond is approaching the most negative level in the past decade, indicating that the two asset classes have recently had opposite trends. Andrew Hazlett, a forex trader at Monex, stated that after experiencing the intense volatility caused by the US-Iran conflict, market sentiment is showing signs of fatigue. If the peace agreement reached this week between the US and Iran can continue to be effective, then the future market pricing logic will return to interest rates and central bank policy. "The market has been quite exhausted by recent fluctuations," Hazlett said. "If the situation in the Middle East remains stable, interest rates and central bank policies are likely to once again become the core factors driving market trends."