Wall Street collectively changed tune overnight! KKR expects "higher for longer" interest rates to persist until 2029, bets 10-year US Treasury yields will break 5.1% by year-end.

According to Zhitong Finance APP, the American private equity firm KKR has raised its forecast for long-term US Treasury yields and stated that it expects the Federal Reserve to keep its benchmark interest rate at higher-than-previously-anticipated levels, citing concerns from Fed Chair Walsh about persistently high inflation.

KKR expects the yield on the 10-year US Treasury to end this year at 5.1%, higher than the previous forecast of 5.0%; and to end 2027 at 4.9%, higher than the previous forecast of 4.7%. KKR expects the Federal Reserve to hike rates again in December, followed by another raise in March next year; the company now anticipates rates will remain at these levels until early 2029, compared to its earlier forecast of keeping rates until 2028.

The team led by Henry McVey, KKR's Global Head of Macro and Asset Allocation, wrote, "We continue to believe that, in the context of elevated nominal growth, large fiscal deficits, and ongoing competition for capital, investors at the long end of the curve will demand a fairly substantial term premium."

Following Wednesday's rate hike, traders increased their bets on further Fed tightening, with market pricing indicating three more hikes of 25 basis points each over the next 12 months. Although Walsh was careful not to commit to any future moves, he reiterated his dissatisfaction with the inflation trajectory and emphasized the central bank's commitment to price stability.

The KKR team noted that the Fed no longer expects inflation to return to its 2% target before 2029. "In our view, moderately restrictive rates, along with persistent inflation and resilient nominal growth, all support the policy stance of 'higher for longer' on rates."

Wall Street Turns Hawkish as a Whole, Bets Fed's "Rate Hikes Aren't Over"

On Wednesday, the Federal Reserve unanimously voted to raise interest rates by 25 basis points, lifting the federal funds target range to 3.75%-4.00%, marking the first hike since July 2023. Chair Walsh described the move as "removing a dose of accommodation," and reiterated that inflation is "too high and persistent for too long." After the meeting, major Wall Street investment banks almost unanimously raised their expectations for further tightening, with only the pace and scale in question.

The most aggressive stance comes from Bank of America Global Research, which expects the Fed to hike by 25 basis points each in October and December, i.e., another 50 basis points this year, sending the year-end rate to 4.25%-4.50%. It is the only major bank anticipating two more hikes within the year.

Goldman Sachs is also betting on an October hike and expects an additional 25 basis points this year to 4.00%-4.25%. Previously, the bank had thought the tightening cycle ended after September's hike, but the current assessment marks a clear reversal due to a more hawkish dot plot, higher neutral rates, and Walsh’s comments about only removing some accommodation.

JPMorgan, Morgan Stanley, Nomura, HSBC, Barclays, Deutsche Bank, BNP Paribas, Macquarie, and UBS expect the next rate hike to come in December, with year-end ranges at 4.00%-4.25%.

Morgan Stanley Chief US Economist Michael Gapen raised his full-year forecast to three hikes, including the latest, saying bluntly, "If you don't even think your policy is restrictive and oil prices aren't coming down on their own, then there's work to be done." Citi is among the few maintaining its view of no further rate hikes this year, expecting rates to remain at 3.75%-4.00%.

Cross-Institutional Views Also Point to 'Higher for Longer' Rates

James Eggerhoff, Chief US Economist at BNP Paribas, said the two hikes this year are "very likely just the beginning of a long tightening cycle." Gregory Peters, CIO of PGIM Fixed Income, noted that unless inflation data turns, "it's hard to see why they wouldn't raise rates again next month."

It is worth noting that with the late October meeting close to the midterm elections, more institutions see December as the next operable window for a rate hike due to timing sensitivity.

The core variable for disagreement remains oil prices and geopolitics: if energy shocks driven by the Iran situation persist, the pace of rate hikes may accelerate; should oil prices fall, the current actions are more akin to "pre-emptive hikes."

Most institutions believe that Walsh's anti-inflation commitment has moved from rhetoric to action, and the Federal Reserve's process of rebuilding its credibility is just beginning.