HSBC raises Treasury yield forecasts on more hawkish Fed outlook

Investing.com -- HSBC has lifted its U.S. Treasury yield forecasts across the curve, reflecting a more hawkish view of the Federal Reserve's likely path even as the firm sticks to its base case that policy rates stay on hold.

The bank had projected since the start of the year that the Federal Open Market Committee would hold rates steady through 2026 and 2027.

"That view remains our base case, but we now see a nearly even likelihood of a 25bp rate hike in September as the FOMC's debate around rate hikes appears to be on a fine edge," HSBC wrote.

HSBC raised its two-year Treasury yield forecast to 4.20% for end-2026, from 3.85%, and to 3.95% for end-2027, from 3.50%. It now sees 10-year yields at 4.65% by end-2026, up from 4.30%, rising to 4.75% by end-2027.

The bank attributed the changes to a shift in the balance of risks. "An increasingly asymmetric skew in dual mandate risks means the distribution of potential outcomes has changed, and we think this likely sustains upward pressure on front-end yields even if the Fed doesn't tighten policy in the near term," it said.

HSBC added that Chairman Kevin Warsh's speech at the Jackson Hole Economic Symposium provided clarity on the Fed's reaction function that could contain some of the term premium built up over the summer, potentially allowing long-end yields to edge lower in the near term.

Over a longer horizon, however, the bank maintained its view that persistently large fiscal deficits point to a steepening Treasury curve.

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