Fed’s Rate Cuts to Shape 2025 Bond Market
As the Federal Reserve sets the tone for the US economy, Wall Street is predicting a decline in short-term Treasury yields in 2025, despite the looming impact of President-elect Donald Trump’s trade and tax policies.
A Shift in Focus
Investors are expected to shift their attention from the pace of rate cuts in 2024 to the Fed’s continued easing cycle in 2025. According to a JPMorgan Asset Management team, the Fed is still in cutting mode, and investors should recognize this trend.
Yield Forecast
The median view among 12 strategists is for the two-year Treasury note yield to fall by around 50 basis points to 3.75% in 12 months. For longer-term 10-year Treasuries, strategists see the yield ending 2025 at 4.25%, some 25 basis points lower than current levels.
Factors at Play
Several factors will influence the bond market, including divergent views on fiscal policy, the Fed’s management of its Treasury holdings, and the end of quantitative tightening. Additionally, the Trump administration’s trade and tax policies will unfold in the coming weeks, potentially upending Wall Street’s outlooks.
Divergent Views
Morgan Stanley and Deutsche Bank hold the most bullish and bearish views, respectively, on the bond market. Morgan Stanley anticipates a speedier pace of Fed rate cuts, expecting the 10-year yield to fall to 3.55% next December. Deutsche Bank, on the other hand, forecasts no Fed cuts in 2025, expecting the 10-year yield to rise to 4.65% on strong growth, low employment, and stickier inflation.
Economic Outlook
The Federal Reserve’s signaling of fewer rate cuts next year could complicate the path for yields. The median view of Fed officials suggests just a half point of rate cuts in 2025, carrying the risk of a pause in the central bank’s easing cycle. As the economy evolves, the bond market will respond to the interplay of these factors, shaping the yield curve in 2025.
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