Wall Street collectively changed its tune overnight! KKR expects "higher for longer" interest rates to persist until 2029, betting the 10-year U.S. Treasury yield will break above 5.1% by year-end.

Title context: Wall Street collectively changed its tune overnight! KKR expects "higher for longer" interest rates to persist until 2029, betting the 10-year U.S. Treasury yield will break above 5.1% by year-end. Text: U.S. private equity firm KKR has raised its forecast for long-term U.S. Treasury yields and said it expects the Federal Reserve to keep its benchmark rate higher than previously assumed, citing Fed Chair Warsh's concerns about persistently elevated inflation. KKR expects the 10-year U.S. Treasury yield to end the year at 5.1%, up from its previous forecast of 5.0%, and to end 2027 at 4.9%, up from its previous forecast of 4.7%. KKR expects the Fed to hike again in December, followed by another hike next March; the firm now expects rates to remain at those levels until early 2029, compared with a previous forecast of holding until 2028. A team led by Henry McVey, the firm's head of global macro and asset allocation, wrote, "We continue to believe that in an environment of elevated nominal growth, large fiscal deficits and ongoing competition for capital, investors at the long end of the curve will demand a fairly substantial term premium." After Wednesday's rate hike, traders ramped up bets on further Fed tightening, with market pricing implying three more quarter-point hikes over the next 12 months. Although Warsh was careful not to commit to any future action, he reiterated his dissatisfaction with the path of inflation and emphasized the central bank's commitment to price stability. The KKR team said the Fed no longer expects inflation to fall back to its 2% target before 2029. "In our view, modestly restrictive rates, combined with lingering inflation and resilient nominal growth, all support a 'higher for longer' policy stance." Wall Street turns hawkish in unison, betting the Fed's "hiking cycle is not over" The Fed voted unanimously on Wednesday to raise rates by 25 basis points, lifting the federal funds rate target range to 3.75%-4.00%, its first hike since July 2023. Chair Warsh called the move "removing a dose of accommodation" and reiterated that inflation is "too high and has persisted too long." After the meeting, major Wall Street investment banks almost unanimously raised their expectations for further tightening, with disagreement only over the pace and magnitude. The most aggressive was Bank of America Global Research. The bank expects the Fed to hike by 25 basis points each in October and December, another 50 basis points this year, bringing the year-end rate to 4.25%-4.50%, making it the only major bank forecasting two more hikes this year. Goldman Sachs also bets on October, expecting another 25 basis points this year to 4.00%-4.25%. The bank had previously believed the tightening cycle was over after the September hike, a clear reversal in its judgment, citing the dot plot, the upward revision to the neutral rate and Warsh's remarks that the Fed had only "removed a degree of accommodation," all of which were more hawkish than expected. JPMorgan, Morgan Stanley, Nomura, HSBC, Barclays, Deutsche Bank, BNP Paribas, Macquarie and UBS expect the next hike in December, with a year-end rate range of 4.00%-4.25%. Morgan Stanley chief U.S. economist Michael Gapen raised his full-year forecast after the meeting to three hikes including this one, saying bluntly: "If you don't even think your policy is restrictive, and oil prices aren't going to come down on their own, then you've got work to do." Citi became the minority, maintaining its forecast of no further hikes this year and expecting rates to stay at 3.75%-4.00%. Cross-institutional views also point to "higher for longer" rates BNP Paribas chief U.S. economist James Egelhof said two hikes this year "are very likely just the beginning of a long tightening cycle." Gregory Peters, chief investment officer of fixed income at Prudential, said that unless inflation data turn, "it's hard to say they won't keep hiking next month." It is worth noting that the late-October meeting is close to the midterm elections, making the timing sensitive, so more institutions see December as the next operable hiking window. The core variables in the disagreement remain oil prices and geopolitics: if the energy shock triggered by the Iran situation persists, the hiking path could accelerate; if oil prices fall back, this round of action is closer to a "preventive hike." Most institutions believe Warsh's anti-inflation commitment has shifted from rhetoric to action, and the process of rebuilding the Fed's credibility has only just begun.