Renewed fighting tied to the U.S.-Israeli war with Iran, together with the attendant pick-up in oil prices and revived inflation concerns, have done little to shake the broad expectations among surveyed bond strategists that shorter-term U.S. Treasury yields will fall as markets reprice the outlook for the Federal Reserve.
In recent sessions, Treasuries came under pressure after oil surged nearly 10% amid a fresh flare-up in the conflict, reversing a short-lived move back toward pre-war levels. That rise in energy costs and comments from several Fed policymakers about the persistence of inflation helped push benchmark yields to multi-week highs: the 10-year traded around 4.6% and the 30-year moved back above 5.0%.
Despite those moves, strategists surveyed remained largely unchanged in their near-term outlooks. The rate-sensitive two-year Treasury yield, sitting just under an 18-month high at about 4.20%, was still expected to ease - albeit by a slightly smaller margin than in the prior month’s poll. Median projections from the July 6-9 poll pointed to a fall of roughly 20 basis points in three months to 4.00%, to 3.90% in six months and to 3.85% in a year.
Joseph Purtell, a portfolio manager at Neuberger Berman, said that in his view Treasury yields should remain broadly stable or edge lower in the months ahead, with the front end of the curve leading any decline. He argued current market pricing of Fed policy - which implies somewhere between one and two quarter-point hikes this year - is excessive and does not align with the data or the broader macro backdrop. Purtell expects the Fed to hold policy steady well into next year.
On the 10-year note, the median forecast from 74 strategists called for the yield to hold near 4.48% in three and six months before dipping to 4.39% in a year.
Inflation expectations and market pricing
Market measures of inflation expectations, such as Treasury inflation breakeven rates, remain elevated relative to the Fed’s 2% target but have fallen back considerably from highs seen in May. When asked whether the current pricing of the 10-year Treasury was appropriate, 28 of 40 respondents to an additional question - roughly 70% - said it was about right; eight said it was too low and four said it was too high.
Jason Williams, director of U.S. rates research at Citi, said inflation appears to be priced as too sticky by markets. He noted that the market is already embedding almost 40 basis points of rate hikes for the rest of the year - a sizable amount - and suggested that if actual hikes were zero, that alone could reduce 10-year yields by around 30 basis points or slightly more. Williams also put forward a year-end view, forecasting a 10-year yield of 3.9% if the Fed pauses and markets then price in a cut next year; his 3.9% projection is the lowest six-month forecast in the survey.
Voices warning inflation may persist
Not all strategists were convinced that inflation pressures will be fleeting. Meghan Swiber, director of U.S. rates strategy at Bank of America, noted that the Fed is currently more concerned about the inflation side of its mandate and that, as of the June meeting, participants saw risks to inflation.
Bank of America’s forecast sits at the hawkish end of the spectrum in the survey: it projects three quarter-point Fed rate hikes in 2026 and pegs the two-year yield at 4.50% at year-end.
Mike Bell, head of market strategy at RBC BlueBay Asset Management, echoed the view that markets may be underestimating inflation risks. Both Bell and Swiber highlighted that a resilient U.S. economy and a sturdy labor market create an environment in which inflationary pressures could be underpriced by current market expectations, implying Treasury yields might be more likely to rise than fall.
Market reaction to the war and Fed timing
Markets fully priced out rate cuts after the war began and currently imply roughly one to two quarter-point hikes this year. Economists in separate surveys have steadily pared back expectations for rate reductions since April, with a strong majority now predicting a hold on policy. That shift in both market and economist expectations has contributed to the repricing of yields even as strategists maintain a generally consistent forecast for easing at the front end.
The divergence in views among strategists underscores the uncertainty facing markets: while a plurality sees current 10-year pricing as appropriate and expects short-term yields to decline modestly, a subset of strategists cautions that persistent inflation and stronger economic momentum could keep yields elevated or push them higher.
For now, the prevailing view among the surveyed strategists is that, barring a material change in the data or the policy stance of the Fed, the near-term trajectory for shorter-dated Treasuries points toward stability or a gradual easing, even as geopolitical tensions and oil price volatility create episodic upward pressure on longer-term yields.