Source: Golden Ten Data

Despite the looming threat to the bond market from President-elect Trump’s trade and taxes, Wall Street is taking a cue from the Federal Reserve, predicting that U.S. short-term Treasury yields will rise in 2025 decline.

Strategists are mostly unanimous in predicting that the yield on the 2-year Treasury note, which is more sensitive to Federal Reserve interest rates, will fall. They believe yields will fall by at least 50 basis points from current levels 12 months from now.

“While investors may be myopically focused on the pace and magnitude of rate cuts next year, investors should take a step back and realize that the Fed remains in rate-cutting mode through 2025,” David J.P. Morgan Asset Management - David Kelly's team said in the company's annual outlook.

U.S. bond watchers expect short-term bond yields to fall in 2025

However, the Federal Reserve At the March meeting, the Fed said it would cut interest rates less frequently next year, which could complicate the trajectory of yields.

Currently, the median forecast by Fed officials shows that the rate cut in 2025 will be only 50 basis points, which is roughly the same as the trend of 2-year U.S. Treasury yields predicted by Wall Street, but it also brings about the Fed’s will Risks of pausing the easing cycle. The yield curve steepened on Thursday, reaching its highest level since June 2022, as investors reconsidered holding longer-dated bonds after Federal Reserve Chairman Jerome Powell placed the blame for a possible pause on further rate cuts solely on inflation. benefit.

Tracey Manzi, senior investment strategist at Raymond James, said: “As the outlook for the easing cycle becomes shallower, so will the front end of the curve. Any steepening will be dominated by the long end of the curve. The median forecast among 12 strategists is that the 2-year Treasury yield will fall by about 50 basis points in one year. , to 3.75%. For the longer-dated 10-year Treasury note, strategists believe the yield, which was about 4.52% last Friday, will reach 4.25% by the end of 2025, about 25 basis points below current levels.

Noel Dixon, macro strategist at State Street Securities, said: "No matter how you analyze it, whether it is actual growth, inflation expectations or term premiums, Long-term bonds will be under pressure." He has been predicting that the 10-year U.S. bond yield may rise above 5% in 2025.

They are taking into account not only differing views on how fiscal policy may evolve, but also the Fed's management of its holdings of Treasury securities. The end of the Fed's balance sheet reduction, known as quantitative tightening, could reduce the supply of bonds, thereby stimulating demand.

Barclays led by Anshul Pradhan"Even if the Fed is likely to continue to cut interest rates, pushing front-end yields lower, many of the factors that believe long-term yields will continue to move higher remain: a high neutral rate, increased interest rate volatility, and inflation risk premiums," the team wrote in a note. and large net issuances amid price-sensitive demand.”

Ira F. Jersey and Will, strategists at Bloomberg Intelligence. Hoffman believes that "a steady-state economy in early 2025 may lead to the Federal Reserve slowly cutting interest rates and possibly lowering the interest rate ceiling to 4%. It may require a major shift in the economy for the 10-year U.S. Treasury yield to not be between 3.8% and 4.7%." %.”

In addition, Trump’s tariffs and taxes will unfold in the coming weeks, which may upend Wall Street’s outlook.

Pradhan said: "Higher tariffs and tighter immigration controls indicate that economic growth will slow down, but inflation will rise."

At present, Morgan Stanley and Deutsche Bank have the most bullish and bearish views on the bond market, respectively. Morgan Stanley believes that "economic growth faces downside risks" and investors will usher in an "unexpected bull market." The company expects the Fed to cut interest rates faster than other banks, so it expects the 10-year U.S. Treasury yield to fall to 3.55% in December next year.

Deutsche Bank predicts that the Federal Reserve will not cut interest rates in 2025. The team led by Matthew Raskin predicts that due to strong economic growth, low employment and high inflation, the 10-year U.S. Treasury yield will rose to 4.65%.

"We expect the main catalyst for our view to be the realization that inflation and labor market conditions require the Fed to adopt a more stringent path than currently priced in," they wrote in a note.