Renewed hostilities in the U.S.-Israeli war with Iran and revived inflation risks have done little to sway most bond strategists surveyed by Reuters who still expect shorter-dated U.S. Treasury yields to fall as markets abandon bets for Federal Reserve rate hikes.

Treasuries came under pressure this week after oil prices surged nearly 10% as the conflict escalated again, reversing a brief return to pre-war levels, as expectations the Fed will keep interest rates higher for longer pushed yields to multi-week highs.

The benchmark 10-year yield climbed to around 4.6% and the 30-year moved back above 5.0%, with several Fed policymakers warning inflation could prove persistent. U.S. inflation is currently more than twice the Fed’s 2% target.

Markets fully priced out Fed rate cuts after the war began and now imply roughly one to two quarter-point hikes this year. Economists in separate Reuters surveys have also steadily removed their rate reduction views since April with a strong majority now predicting a hold.

But bond strategists have stayed remarkably consistent in their outlook.

The rate-sensitive two-year yield, currently a shade below an 18-month high at 4.20%, was still predicted to fall in the July 6-9 poll, though slightly less than June forecasts – about 20 basis points in three months to 4.00%, to 3.90% in six and 3.85% in a year.

“Over the next few months we see Treasury yields as largely stable, if not slightly lower, led by the front end of the curve … Current market pricing of Fed policy, anywhere from one to two hikes … is excessive,” said Joseph Purtell, portfolio manager at Neuberger Berman, who expects the Fed to remain on hold well into next year.

“At this juncture, hikes are not warranted by the data nor the backdrop we find ourselves in – both from the composition of the FOMC, as well as the current macroeconomic environment,” Purtell added.

The 10-year yield was forecast to hold broadly steady at 4.48% in three and six months before easing to 4.39% in a year, according to median forecasts from 74 strategists.

Inflation? No Problem

Treasury inflation breakeven rates, market gauges of inflation expectations, remain elevated but have retreated well below May’s highs.

But 70% of respondents who answered an additional question – 28 of 40 – said the 10-year Treasury note’s current pricing was about right. Eight said it was too low and four said too high.

“Inflation is priced too sticky in the marketplace right now,” said Jason Williams, director of U.S. rates research at Citi. “The market is already pricing almost 40 basis points of rate hikes for the rest of this year – quite a chunky number. If that ends up being zero, that alone could be worth 30-odd basis points in 10-year yields, if not a little more.”

“By the end of this year, if the Fed is on pause, you can price in a rate cut for next year as well,” he added, predicting a 10-year yield of 3.9% at year-end – the lowest six-month forecast in the survey.

Inflation? Problem

But not all are convinced price pressures will prove fleeting.

“The side of the mandate the Fed is worried about right now is inflation, and all FOMC participants saw risks to that as of the June meeting,” said Meghan Swiber, director of U.S. rates strategy at Bank of America.

BofA forecasts three quarter-point Fed rate hikes in 2026 and the two-year yield at 4.50% at year-end, the most hawkish in the survey.

Both Swiber and Mike Bell, head of market strategy at RBC BlueBay Asset Management, said markets were underestimating inflation risks, suggesting Treasury yields were more likely to rise than fall.

“We think the U.S. economy remains pretty healthy and the labor market holds up pretty well … Against that backdrop, inflation pressures are underpriced,” Bell said.

(Reporting by Sarupya Ganguly; Polling by Indradip Ghosh and Shaloo Shrivastava; editing by Philippa Fletcher)