HSBC raises Treasury yield forecasts on more hawkish Fed outlook

HSBC has increased its projections for U.S. Treasury yields, indicating the Federal Reserve is more likely to raise interest rates, despite the bank's belief that rates will remain unchanged for now. The investment firm had expected the Federal Open Market Committee to keep rates steady through 2026 and 2027, but now sees a roughly 50-50 chance of a 25 basis point hike in September.

HSBC has raised its two-year Treasury yield forecast to 4.20% by the end of 2026, from 3.85%, and to 3.95% for the end of 2027, from 3.50%. It also anticipates 10-year yields of 4.65% by year-end 2026, up from 4.30%, and a further rise to 4.75% by the end of 2027.

The bank's adjustments are linked to a shift in the balance of risks between the Federal Reserve's dual mandate objectives. HSBC notes that an uneven risk skew in dual mandate priorities means the distribution of potential outcomes has changed, likely maintaining upward pressure on short-term yields, even if the Fed doesn't tighten policy in the near future.

Chairman Kevin Warsh's speech at the Jackson Hole Economic Symposium has provided clarity on the Fed's reaction function that could help reduce some of the term premium built up over the summer, potentially allowing long-end yields to edge lower in the short term. However, HSBC maintains its view that persistently large fiscal deficits will point to a steepening Treasury curve over the longer term.