Wall Street is falling further and further behind in assessingthe direction of the $14.1 trillion Treasuries market.

In March, the consensus was that 10-year yields would be well ontheir way to 3% by now. Inflation and economic growth would takehold, and the Federal Reserve would potentially tighten three timesin 2017 — perhaps even four. Or so the argument went.

Fast forward to the present, and the 10-year yield is barelyabove 2%, a key psychological level, which means going back to thedrawing board yet again. Forecasters now see 10-year yields risingto 2.48% at year-end, according to the latest Bloomberg poll. Theprojection for the end of this year is the lowest since November,just like yields themselves. As for clearing 3%? Wait until2019.

“I always say if you can't forecast, you forecast frequently,”said Dimitri Delis, senior econometric strategist in Chicago atPiper Jaffray & Co. His year-end prediction for the 10-yearyield has been 2.1% since March. “We're in a disinflationaryenvironment that will be with us for several years. That's what'sbeen keeping the 10-year rate trending down.”

The changing outlook shows how pessimistic the bond market hasbecome as hopes for reflation have faded and the Trumpadministration fails to deliver on its fiscal stimulus promises.For analysts swept up in those expectations, which pushed the10-year yield to a two-year high of 2.64% in December, it's been ascramble to revise forecasts lower. For those who wagered thatstructural forces like an aging population and slow productivitywould win the day, 2017 has been about as expected.

The Fed's preferred inflation gauge has declined for fivestraight months since climbing to 2.2% in February, the highestreading since 2012. At 1.4 percent as of July, it's well below thecentral bank's 2 percent goal.

Expectations for Fed tightening have faded accordingly. Themarket-implied odds of another rate increase by year-end plungedbelow 25% last week, using the current effective fed funds rate andthe forward overnight index swap rate. Fed funds futures aren'tfully pricing in another hike until 2019.

Dots Divergence

That's a stark contrast with policy makers' “dot plot,” whichimplies roughly four quarter-point hikes over that period. To somestrategists, the divergence signals that the market has gotten toopessimistic, meaning yields are bound to rise.

“We are probably getting to the low end of where we'll go onthis run down,” said Steve Barrow, a London-based strategist atStandard Bank. “Cooling in the North Korean situation,balance-sheet normalization and a rate hike leads me to think thatyields will be a little bit higher.”

Barrow's forecast in March was for the 10-year yield to increaseto 3.4% by the end of 2017, among the highest in Bloomberg'ssurvey. His latest estimate is for 2.4%.

He's come around to the view that if yields climb, they'll do itslowly. He doesn't see the 10-year yield touching 3% until about ayear from now, at best. And if some unforeseen global conflictarises, you can toss that call out the window.

“If I'm significantly wrong on where that rate will be, it won'tbe because it's substantially higher, but substantially lower,” hesaid. “Then that's really more a geopolitical issue.”

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