Source: Zhithon Finance

Wall Street is predicting that short-term U.S. Treasury yields will fall in 2025, despite the impending threats from the trade and tax policies of incoming President Trump on the bond market. Strategists' predictions are largely consistent, suggesting that the 2-year U.S. Treasury yield, which is more sensitive to Federal Reserve interest rate policy, will decline. They expect that 12 months from now, rates will drop by at least 50 basis points from current levels.

The Asset Management team at JPMorgan, led by David Kelly, stated in the company's annual outlook: “While investors may be shortsighted in focusing on the pace and magnitude of interest rate cuts next year, they should take a step back and recognize that the Federal Reserve will still be in a rate-cutting mode in 2025.”

However, the Federal Reserve hinted at its meeting this month that the magnitude of rate cuts next year will be small, which could complicate the trend of yields. Currently, the median expectation among Federal Reserve officials indicates that the Fed will only cut rates by 50 basis points in 2025—roughly equivalent to the decline predicted for the 2-year US Treasury yield by Wall Street—but this means that there is a risk of a pause in the Fed's easing cycle. With Federal Reserve Chairman Powell placing the responsibility for further rate cuts entirely on inflation, the yield curve steepened on Thursday to its highest level since June 2022, as investors reconsidered the value of holding longer-term bonds.

Tracey Manzi, a Senior Investment Strategist at Raymond James, stated: “Given that the expected easing cycle will be shortened, the front end of the curve will follow this trend. Any steepness we see will be dominated by the long end of the curve.”

The median forecast from 12 strategists is that the 2-year US Treasury yield will fall by about 50 basis points to 3.75% in a year. Just before the Federal Reserve released its latest economic forecasts last week, this rate prediction had already risen by nearly 10 basis points. For the longer-term 10-year US Treasury yield, strategists expect it to reach 4.25% by the end of 2025, approximately 25 basis points lower than its current level.

Noel Dixon, a Macro Strategist at State Street, stated: “No matter how you analyze it, whether through real growth, inflation expectations, or term premium, long-term bonds will be under pressure.” Dixon has continually predicted that the 10-year US Treasury yield could rise to over 5% by 2025.

They have considered not only differing views on how fiscal policy might evolve but also the Federal Reserve's management of its holdings of US Treasuries. The central bank's end to what is called Algo tightening, or the reduction of its balance sheet, could lower the supply of bonds, thereby boosting demand.

The Barclays team led by Anshul Pradhan wrote in a report: “Although the Federal Reserve may continue to lower the policy interest rate, which lowers front-end yields, many factors supporting high long-term yields still exist: higher neutral rates, increased interest rate volatility, inflation risk premium, and significant net issuance under price-sensitive demand.”

Bloomberg Analysts Ira F. Jersey and Will Hoffman stated: “If the economy stabilizes in early 2025, the Federal Reserve may slowly cut rates and possibly lower the interest rate cap to 4%. A significant economic shift may be needed if the 10-year USA government bond yield does not hover between 3.8% and 4.7%.”

Next are Trump's tariffs and tax policies, which will be announced in the coming weeks and may disrupt Wall Street’s outlook. Pradhan said: “Higher tariffs and stricter immigration controls would lead to slower economic growth but increase inflation.”

Currently, Morgan Stanley and Deutsche Bank have the most optimistic and pessimistic views on the Bonds market, respectively.

Morgan Stanley believes that investors will face “downside risks to economic growth” and “unexpected bull markets.” The firm expects the pace of the Federal Reserve's rate cuts to be faster than other Banks, thus predicting that the 10-year USA government bond yield will fall to 3.55% by December next year.

Deutsche Bank, on the other hand, predicts that the Federal Reserve will not cut rates in 2025. The team led by Matthew Raskin expects the 10-year USA government bond yield to rise to 4.65% under conditions of strong economic growth, low employment, and intensified inflation. They wrote in a report: “We expect the main factors contributing to our viewpoint are that people recognize that the inflation and employment market conditions require the Federal Reserve to adopt stricter policies than currently priced.”

编辑/jayden