The 10-year U.S. Treasury yield is expected to rise to 2.7% this year, as persistently high inflation strengthens the case for an aggressive path of interest rate hikes, Credit Suisse said Wednesday.

That is one of the most aggressive forecasts of any major bank, and follows the surge in U.S. annual inflation to a 40-year high in January that has fueled expectations the Federal Reserve will have to act aggressively to bring inflation back towards target.

Inflation Comes In High

"Inflation has continued to exceed expectations, and there are reasons to believe its projected normalization is either overly optimistic or requires significantly tighter financial conditions to come to fruition, including a higher terminal rate," trading strategist Jonathan Cohn said in a report.

Cohn revised his U.S. yield forecasts higher, with the benchmark 10-year yield now seen ending the year at 2.7%. That is 50 basis points (bps) above his previous forecast and at least 35 bps higher than many Wall Street banks, including Citi, Goldman Sachs and JP Morgan, are predicting.

The 10-year U.S. Treasury yield hit 2% on Thursday for the first time since August 2019 after the January inflation report.

Concerns this year that the Fed would tighten policy aggressively have pushed up yields while flattening the yield curve -- a sign of a potential slowdown in economic growth.

Yield Curve Tempers Buying Interest

"We expect the curve to continue to flatten, but believe the extent to which flattening is already priced leaves little appeal to adding further exposure," Cohn said.

Short-dated Treasuries - which closely reflect interest rate expectations - will continue to lead the overall increase of yields across the curve, said Cohn.

But a slower normalization in inflation and a Fed that could seek to reduce its balance sheet more actively to push yields higher, could lead to "less term premium compression than previously anticipated," he added.