"Powell Put Expectations Difficult... US 10-Year Bond Yield Should Keep Floor Open Up to 4%"

There is an analysis from the securities industry suggesting that investors need to prepare for the possibility that the yield on the U.S. 10-year Treasury note could drop to as low as 4% during the upcoming second quarter.

Seungwon Kang, a researcher at NH Investment & Securities, stated in the report titled '18 out of 19' on the 24th, "Both the Trump put and the Powell put are unlikely to be expected, and a policy vacuum will continue." The Trump put and Powell put refer to policies in the financial market where the Trump administration or the Federal Reserve (Fed) defends against a market crash, respectively.

First, Kang noted that at the March Federal Open Market Committee (FOMC) meeting, 18 out of 19 Fed members pointed to upside risks to inflation forecasts and downside risks to economic forecasts. Additionally, 17 out of 19 members indicated upside risks to unemployment forecasts. He said, "Within the Fed, there is an 'extreme bias' toward the possibility that inflation, the economy, and unemployment will all be worse than expected," adding, "Currently, there is a significantly high chance that the Fed's baseline scenario is incorrect."

He continued, "The problem is that if the baseline forecast is wrong, there is a high possibility that Powell will signal 'stagflation,' which he currently denies, to the market," and "At present, even the Fed lacks confidence in its forecasts. Given the Fed's past policy failure in 2021 due to judging inflation as 'transitory,' it is difficult for them to take action, so expecting a Powell put is premature."

He further explained, "The U.S. 10-year Treasury yield has sharply fallen to the 4.3% level, which our firm identified as the first target after Trump's inauguration, and is now in a consolidation phase," emphasizing, "For market interest rates, which have been moving within a range, to set a direction, the key is how the actual effects of the new administration's policies are reflected in the indicators."

He also pointed out that in the recent policy vacuum, the sentiment index of the upper-income class is weakening, which could lead to an actual slowdown in consumption in the future. Kang recommended, "Even if the U.S. 10-year yield falls to 4%, this level is far from a recession," and advised, "We recommend preparing for the possibility of an additional decline in the 10-year yield to 4% during the second quarter."

Additionally, he estimated that operating profits of companies listed on the KOSPI and KOSDAQ will surge by 66.6% year-on-year in 2024, and forecasted that issues related to the supplementary budget in the first half of the year will be offset by corporate tax revenues.