What does it mean for the U.S. economy to fall into recession? Several Wall Street analysts: U.S. bond yields could fall to 2%

By: Abraham May. 05,2023

Wall Street strategy analysts believe that the rise of U.S. bonds will accelerate as the U.S. economy heads into recession. Some analysts even believe that if the recession in the U.S. economy is more severe than currently expected, by early next year, the 10-year U.S. bond yield may fall to the level of 2%. Mizuho Bank and JP Morgan Asset Management have made this prediction of 2%.

The vast majority of analysts in the current market seem to be firmly bullish on bonds. The increased risk of recession in the U.S. economy, or forcing the Federal Reserve to take more aggressive action to cut interest rates, is the reason for the long U.S. bonds.

Gundlach, a well-known investor, said this week that the possibility of a U.S. recession is "quite high. The turmoil in the U.S. banking sector has intensified traders' bets that the Federal Reserve will cut interest rates later this year to save the troubled economy.

Currently, investors are snapping up U.S. bonds. The yield on the 10-year U.S. Treasury note has fallen about 75 basis points from its March high to sit at 3.33 percent. If the U.S. bond yield can fall to the aforementioned 2% forecast, investors who are long U.S. bonds at Thursday's point can make a profit of about 13%. Some fund managers say outright that any sell-off in U.S. bonds should be seen as a buying opportunity.

Many industry insiders believe that bond market yields will likely be stronger than the stock market. gundlach's latest expression of concern for U.S. stocks, that the S&P 500 will see a decline next after a period of range trading continues, as well as difficulty in breaking the 4200-4300 point barrier.

However, the market is not without its shorts. The short side of U.S. bonds believes that bulls in U.S. bonds may be disappointed if higher-than-expected inflation in the U.S. forces the Fed to maintain a hawkish stance. Some analysts expect that the bond market is currently very close to the bottom of the U.S. bond yield range, which is the 3.33% line, because it expects inflation to fall too fast. Even if there is a deterioration in the situation of regional banks, the Fed's actions at that time may not match the current pricing of the market.

On Wednesday, the Fed announced its FOMC resolution, raising rates by another 25 basis points as expected, suggesting a pause in action thereafter. This at one point sent U.S. stocks higher intraday. But since then Fed Chairman Jerome Powell has said that there is still a long way to go to lower inflation and that a rate cut would not be appropriate given the Fed's view that inflation will take some time to fall. "If inflation remains high, we will not cut rates. the FOMC's inflation outlook does not support a Fed rate cut."

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