On Wall Street's bond desk, it seems everyone has their own opinion on the neutral interest rate.

In fact, as bond veteran Greg Peters stated, 'No one knows what the neutral interest rate is.'

Of course, they know what it is. It's simple: a benchmark interest rate level that neither stimulates nor slows down the USA economy. But they don't know how to calculate this figure precisely given that both supply and demand were impacted during the pandemic, and the economy is still adjusting.

This is precisely why the calculations from both Wall Street and the Federal Reserve are widely varied. Conversely, this also means that investors have greatly differing views on whether the Federal Reserve's three-month easing cycle (aimed at reducing the benchmark interest rate back to neutral levels as inflation cools) is just beginning or nearing its end.

All of this has caused recent bond yields to fluctuate wildly, especially after data showed the economy unexpectedly strong or weak. Peters said, 'It is definitely schizophrenic.' He is the co-chief information officer at PGIM Fixed Income, which manages more than $800 billion in assets.

'It is really very, very unstable. For example, on the days when the monthly employment report is released, the fluctuation amplitude of the two-year U.S. Treasury yield is now on average six times that of before 2022,' he said.

In other words, the risks in the bond market have increased. If the judgment on the neutral interest rate is wrong, the losses could be significant, which is a troubling prospect for investors who are still struggling to recover from the severe downturns over the past three years.

For example, betting on a neutral interest rate below 3% means betting that the Federal Reserve will lower the benchmark interest rate by a few percentage points, thus buying bonds that currently yield slightly above 4%. However, if it turns out that the Federal Reserve has almost completed its rate cuts, then the bond positions accumulated around the current yield are likely to incur new losses.

Peters' solution is to proceed cautiously.

He admits he does not know the exact neutral interest rate and says, "I don’t understand the obsession with a fictional number," so his plan is to sell U.S. Treasury bonds when the 10-year Treasury yield falls to 3.5% and buy when the yield climbs to 4.5%.

For years, it has generally been believed that the neutral interest rate is quite low. Of course, there is disagreement over the exact level of the neutral interest rate, but there has been a broad consensus during the economic slump after the 2008 financial crisis that the neutral interest rate hovers around 2.5%. However, the COVID-19 pandemic disrupted this. The surge in inflation post-pandemic has not been as temporary as Federal Reserve policymakers insisted. The subsequent push for the economy has not been either.

So much fiscal and monetary stimulus has been injected into the financial system that inflation and economic growth remain high even after the Federal Reserve rapidly raised interest rates in 2022 and 2023.

Along with other emerging inflationary forces, such as the expansion of the U.S. budget deficit and the gradual advancement of global trade barriers, most people clearly recognize that the neutral interest rate has risen. There is intense debate about the extent, including at Federal Reserve meetings.

Estimates of long-term interest rates by policymakers are generally seen as representing the neutral interest rate, ranging from a low of 2.375% to a high of 3.75%. This is the widest range since the Federal Reserve began publishing these data over a decade ago.

Officials will update their estimates at the policy meeting next week, where it is widely expected that they will lower the benchmark interest rate by another 25 basis points, to between 4.25% and 4.5%.

Outside of the Federal Reserve, this range is even broader. Dallas Fed President Logan has compiled various estimates from the economic community. She believes that the lowest estimate is around 2.7%, and the highest is about 4.6%, which actually equals the current benchmark interest rate.

Given all this confusion, some investors, like Peters, simply avoid making bold judgments. At TwentyFour Asset Management, portfolio manager Felipe Villarroel is trying to avoid holding short-term U.S. Treasury positions to prevent being hit hard by one or two unfavorable data releases. JPMorgan's chief investment strategist Thomas Kennedy is urging many of his clients to reduce the risk in their portfolios.

"You do not know where the Federal Reserve will go. Therefore, you either have to bow to their fluctuations or respect that there are many outcomes, and you really should not take on too much risk over this," Kennedy said.

Another camp holds a firm belief in a bullish neutral interest rate, hoping to find opportunities for their clients to make significant profits. Max Kettner, chief multi-asset strategist at HSBC Global Research, said, "This is exactly what people want. At least for those who lamented how persistently low interest rates have stifled volatility and profit opportunities in the bond market ten years ago."

In the view of Henry McVey, a partner at KKR & Co, the formula for current fixed income portfolios is simple: Sell long-term Bonds, hold a lot of Cash, and simultaneously Hold assets that have "dividend or cash flow characteristics that are more attractive at a higher neutral rate," such as infrastructure or Real Estate.

This is because he believes that the neutral interest rate has jumped above 3%. After Trump's election, he feels more confident in this view, stating that Trump will implement business-friendly policies, further stimulating economic growth.

The Deutsche Bank strategists are more aggressive, locking the neutral interest rate at around 4%, so by the end of the year the yield on 10-year US Treasuries will reach about 4.65% (higher than the current approximately 4.3%).

On the other hand, fund managers at TCW Group have not given up their view that the pandemic did not significantly impact the neutral interest rate. Over the past few years, TCW's flagship fund has consistently ranked at the bottom of its industry. However, they continue to Hold 2 to 5-year U.S. Treasury bonds, which is part of a broader bet that the yield curve will steepen, as they expect the U.S. economy to slow down next year and the Federal Reserve to significantly cut rates. TCW's co-head of global rates, Bret Barker, said, "We still believe the neutral interest rate is 2.5%."