Economists are increasingly upbeat about the U.S. economy, with a growing consensus that the country is headed for what is known as a soft landing.
In the latest quarterly survey conducted by The Wall Street Journal, 65 economists have collectively lowered their recession probability forecast for the next year. Previously standing at an average of 54% in July, this figure has now taken a significant dip to a more encouraging 48%, falling below the 50% mark for the first time since the middle of the previous year.
This figure is relatively more optimistic than the New York Federal Reserve’s model, which still suggests a 56% chance of a recession due to the yield differential between ten-year and three-month Treasuries.
Economists Change Tune
Economic experts are increasingly of the opinion that the Federal Reserve has wrapped up its current cycle of interest rate hikes.
After pushing short-term borrowing costs to a 22-year high of 5.25% to 5.5% in July, nearly 60% of surveyed economists believe that the Fed is now done raising rates. Of those, 23% predict the final rate hike to occur in November, with 11% anticipating it in December.
Conversely, market expectations offer a slightly less dovish outlook. CME Group Inc. CME’s FedWatch tool reflects a 90% probability of the Fed holding rates steady in November, with a two-third chance assigned to the same outcome in December.
Inflation and Treasury Yields in Focus
Economists also foresee improvements on the inflation front. The consumer-price index, which stood at 3.7% in September, is expected to ease down to 2.4% by the end of the next year, further declining to 2.2% by the close of 2025. These projections align closely with the Federal Reserve’s economic outlook, which anticipates a decrease to 2.5% by the end of 2024 and 2.2% by the close of 2025 for the PCE inflation rate.
Read Also: Inflation Rises 3.7% Year-Over-Year In September, Reigniting Fed Rate Hike Speculations
Additionally, economists are looking to a future with lower Treasury yields. On average, they anticipate the 10-year Treasury yield to conclude this year at 4.47%, with a further drop to 4.16% by the end of June next year.
How Much Could Treasury ETFs Rally Or Decline?
Treasury bond prices move inversely to yields. When yields rise, bond prices tend to fall, and when yields fall, bond prices tend to rise. Treasury ETFs, which hold a basket of Treasury bonds, will experience changes in their net asset value (NAV) accordingly.
The sensitivity of Treasury ETFs to yield changes depends on their duration. ETFs with longer average durations are more sensitive to yield changes. If yields rise, longer-duration ETFs may experience more significant price declines, and vice versa.
The following table displays the potential one-year performance of a selection of U.S. Treasury ETFs in response to fluctuations in yields.
| ETF | Duration | Yield To Maturity | 1-yr return if yields fall 50 bps | 1-yr return if yields fall 100 bps | 1-yr return if yields rise 50 bps | 1-yr return if yields rise 100 bps |
|---|---|---|---|---|---|---|
| BondBloxx Bloomberg Two Year Target Duration US Treasury ETF XTWO | 1.96 | 5.05% | 6.03% | 7.11% | 4.07% | 3.09% |
| BondBloxx Bloomberg Five Year Target Duration US Treasury ETF XFIV | 4.97 | 4.67% | 7.15% | 9.64% | 2.19% | -0.3% |
| BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF XTEN | 9.94 | 4.79% | 9.76% | 14.7% | -0.18% | -5.1% |
| BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF XTWY | 19.91 | 4.83% | 14.8% | 24.7% | -5.1% | -15.1% |
Read Now: IMF Forecasts Robust US Economic Growth, But Warns Of Rising Government Debt
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