KKR Lifts Treasury Yield Forecast, Sees Higher Rates Persisting Until 2029

Private equity firm KKR has revised its forecast for U.S. Treasury yields, anticipating that the Federal Reserve will maintain a “higher for longer” interest rate stance until early 2029. The adjustment follows recent hawkish commentary from the central bank regarding persistent inflation.

KKR's Revised Outlook

KKR now projects the benchmark 10-year Treasury yield will end the year at 5.1%, an increase from its previous forecast of 5.0%. The firm also raised its projection for the end of 2027 to 4.9%, up from 4.7%.

A team led by Henry McVey, KKR's Head of Global Macro and Asset Allocation, wrote that the firm anticipates another Fed rate hike in December, followed by one in March. They now expect rates to remain at those levels until the beginning of 2029, a year longer than their prior forecast of 2028. The strategists noted that in an environment of high nominal growth and large fiscal deficits, "investors on the long end of the curve will demand a considerable term premium."

Wall Street Adjusts to Hawkish Fed

The shift in KKR's outlook is part of a broader repricing across Wall Street following the Federal Reserve's decision on Wednesday to raise the federal funds rate by 25 basis points to a target range of 3.75%-4.00%. In his remarks, Fed Chair Jerome Powell reiterated that inflation remains "too high and has been for too long," prompting major banks to adjust their tightening expectations.

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• Bank of America holds the most aggressive view, now forecasting additional 25-basis-point hikes in both October and December.
• Goldman Sachs reversed its earlier call that the tightening cycle was over, now projecting another hike in October.
• A majority of firms, including JPMorgan, Morgan Stanley, and UBS, anticipate the next rate increase will occur in December.
• Citigroup remains an outlier, maintaining its forecast for no further rate hikes this year.

Market Implications

The consensus among analysts is that the Fed has moved from rhetoric to action to re-establish its inflation-fighting credibility. Morgan Stanley's Chief U.S. Economist, Michael Gapen, commented on the Fed's position, stating, "If you don't even think your policy is restrictive, and oil prices aren't going to come down on their own, you've got work to do."

Market participants are now closely watching key variables, particularly energy prices and geopolitical developments, which could influence the pace of future rate hikes. Prudential Fixed Income's CIO, Gregory Peters, noted that unless inflation data turns, "it's hard to argue they won't go again next month."