By Sarupya Ganguly
BENGALURU (Reuters) - The rise in the safe haven conditions of U.S. Treasury bonds is expected to drift outward over the coming year, according to a poll by bond strategists of a bond strategist.
The 10-year treasury yield has whipped within the 75 base point range, falling to a six-month low before rebounding to a two-month high in a week, pushing a significant bond volatility index to an 18-month high.
The sentiment of abused investors has only partially recovered since Monday's 90-day tariff probation and the U.S.-China trade truce. Interest rate futures are now pricing two lowers this year, and three days ago.
More than 54% of bond strategists, No. 35, said in a Reuters survey from May 8 to 13 that they are concerned about the traditional haven status of U.S. Treasury bonds, which provides a benchmark for pricing global capital markets.
That's about 47% of the April polls, consistent with 55% of FX strategists who expressed similar concerns about the dollar a week ago.
“The attractiveness of the Treasury as a safe haven has eroded due to two key factors: a substantial increase in supply and the potential of the (Trump) administration’s tariff policy,” said Jabaz Mathai, head of the G10 rate at Citigroup.
“Currently, tariffs are the main driver, but fiscal policy will also play a role as we spend the rest of the year,” he said.
“This could be further uneasy if the government manages to push for tax cuts, not just an extension of the 2017 cuts, but also abolishes other commitments to Social Security benefits, tips, and taxes that may lower corporate taxes.”
According to the Treasury Department, the current U.S. debt is currently $36.2 trillion.
"Investors are now more concerned about the long-term fiscal situation. It looks like they have no plans to pay their owes or at least keep the fiscal deficit rising."
Despite a record trade deficit last quarter, as businesses scramble to raise rates early, the world's largest economy is working to make policymakers ease interest rates without any haste.
But sagging investor and consumer sentiment has made the market bet on the slowdown.
When asked which would have a greater impact on their output forecast, i.e. approaching the 60% majority - 19 of 33 fixed income strategists chose recession risk over higher inflation.
"Just as we expect the Fed to maintain a steady and stable position in the benchmark forecast, we are clearly fighting the Fed's choice against the inflation aspect of its mandated," said Steven Zeng, senior U.S. interest rate strategist at Deutsche Bank.
“However, in the context of our 10-year yield forecast, whether the U.S. enters a recession this year will have a greater impact.”
In the survey, median forecasts from more than 50 analysts suggest that within three months, the U.S. 10-year yield (currently 4.46%) will drop to 4.26%, sideways stepping on October 4.27% and mid-year to 4.25%.
"The U.S. government is aware of the economic harm of high tariffs, and it seems they may be more sensitive to bond yields than stock markets," Citi's Mathhai said.
“So it seems logical that we have surpassed the tariff peak and the economic downside may be as serious as we thought in early April.”
"We may be in a difficult situation over the next few months, but by the time we turn the corner into 2026, bond yields may be lower than they are now," Mathai added.
The U.S.-U.S. yields to the U.S. are expected to drop even sharply, down 30 basis points in six months to a median of 3.69% and 3.50% in the year.
(Reported by Sarupya Ganguly; Polls by Purujit Arun and Aman Soni; Edited by Jonathan Wire, Ross Finley and Mark Heinrich)