NEW YORK: Bond traders are bracing for Treasury yields to keep pushing higher after the Federal Reserve (Fed) signalled it’s likely to hold interest rates at lofty levels well into next year.

Fifty-eight percent of the 172 respondents in the Bloomberg Markets Live Pulse survey conducted after the Fed’s decision said that two-year Treasury yields have yet to peak, while a plurality expect 10-year yields to climb over 4.5%.

Two-year rates rose to as much as 5.18% Wednesday, the highest since July 2006, while 10-year yields advanced to about 4.41%.

While the central bank left its benchmark rate unchanged Wednesday, policymakers indicated they may tighten monetary policy once more this year and scaled back estimates for rate cuts in 2024.

The forecasts underscored the central bank’s message that monetary policy is poised to remain tight as the surprisingly resilient economy leaves fighting inflation the predominant concern.

As a result, traders keep pushing out the timing of when the Fed will shift gears, dashing hopes for the bond rally that would likely emerge once it starts cutting rates again.

The totality of recent data has the Fed “emboldened to keep rates higher for longer,” Diane Swonk, chief economist at KPMG, said on Bloomberg Television. “This is a different world than the one we left in 2019.”

The Fed’s break from the low interest-rate environment that had persisted since the 2008 credit-market crash has battered bond investors as prices drop, more than offsetting the income from higher interest payments.

Treasuries are headed toward the third straight annual loss, with the market down 0.6% in 2023 through Tuesday, according to a Bloomberg index. It tumbled 12.5% in 2022, the worst rout since at least the early 1970s.

Traders have been repeatedly caught off-guard when attempting to call the market’s bottom. That’s largely because the economy has confounded forecasters by continuing to grow despite the Fed’s steepest rate hikes in four decades.

With inflation still stubbornly above the central bank’s 2% target, Fed policymakers’ median forecast was for the bank’s benchmark rate to be around 5.6% at the end 2023, and they raised the December 2024 estimate to around 5.1%.

The rate is in a range of 5.25% to 5.5% now.

The majority of Pulse survey respondents, or 57%, said the Fed will keep raising rates, despite the latest pause.

And since in prior cycles Treasury yields have tended to peak around the same level as the Fed’s benchmark, they may have room to rise further, as well.

 - Bloomberg