(Bloomberg) -- Benchmark US Treasury yields could rise to 4.20% as the economy recovers from a slowdown by the end of the year, according to Deutsche Bank AG’s private banking arm. 

Any recession to hit the US is likely to be short-lived, and the Federal Reserve will refrain from cutting interest rates this year as price growth remains elevated, said Christian Nolting, global chief investment officer. That means yields on 10-year Treasuries, a global benchmark for borrowing costs, could rise above 4% once more as the central bank continues to combat the hottest inflation in a generation. 

“Why would the Fed cut rates if the economy is very strong and in order then to find out the need to increase again?” Nolting said in an interview in Singapore. “I think they’d rather wait and then maybe 2024 they can cut” if inflation is really coming down. 

Deutsche’s call clashes with bond bulls who assess that yields could fall to 3.40% on average by year’s end as aggressive Fed rate hikes tip the world’s biggest economy into recession. Traders also expect the Fed to cut rates by year’s end — a bet that Nolting is wary of after a parade of Fed officials stressed their willingness to hike rates and keep them elevated to quash runaway price growth. 

The 10-year US yield last traded at 4.20% in November on peak inflation fears, and was at 3.68% on Friday. Goldman Sachs Group Inc. predicted in November that the US benchmark bond yield will trade at 4% or higher through at least the end of 2024.

Higher Rates

Deutsche’s views come amid a raging debate about just how much further the Fed would hike rates, with Macro Hive arguing the central bank could lift borrowing costs to 8% in its battle against inflation. 

Such a target is “quite dramatic” and remains an outlier view, said Stefanie Holtze-Jen, Deutsche’s Asia Pacific chief investment officer. Deutsche sees US borrowing costs peaking at 5% to 5.25%, which is similar to current money market wagers. However traders then price a quarter-point rate cut by year-end. 

While US yields are likely to climb, bonds are now more attractive after posting their worst year of losses since as far back as 1787, said Nolting. 

“There’s now really some yield, some return to be made on the bond side,” he said. 

--With assistance from Tassia Sipahutar.

(Adds Fed Fund pricing in the seventh paragraph)

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