Wall Street Sides With Fed and Sees Lower US Bond Yields in 2025
(Bloomberg) -- Wall Street is taking its cues from the Federal Reserve, forecasting short-term US Treasury yields to fall in 2025 despite the looming threat of President-elect Donald Trump’s trade and tax policies on the bond market.
Strategists are mostly aligned in their predictions and see a drop in the two-year Treasury note’s yield, which is more sensitive to the Fed’s interest-rate policy. They see a decline of at least half a percentage point from the current level 12 months from now.
“While investors are likely to be myopically focused on the pace and magnitude of rate cuts next year, investors should take a step back and recognize that the Fed is still in cutting mode in 2025,” a JPMorgan Asset Management team led by David Kelly said in the firm’s annual outlook.
Still, the Fed signaled fewer rate cuts next year at its meeting this month which could complicate the path for yields.
The median view of Fed officials now suggests just a half point of rate cuts in 2025 — about on par with the move for two-year yields foreseen by Wall Street — but carries with it the risk of a pause in the central bank’s easing cycle. After Chair Jerome Powell put the onus for further reductions squarely on inflation, the yield curve steepened Thursday to its sharpest level since June 2022 as investors reconsidered the merit of owning longer-dated debt.
“With the outlook for a shallower easing cycle, the front-end of the curve will track that,” Tracey Manzi, a senior investment strategist at Raymond James, said. “Any steepening that we get will be led by the long-end of the curve.”
The median forecast among 12 strategists is for the yield on two-year notes to fall by some 50 basis points to 3.75% a year from now. The rate has climbed nearly 10 basis points since just before the Fed released its updated economic projections Wednesday.
For longer-term, 10-year Treasuries, strategists see the yield, trading around 4.52% on Friday, ending 2025 at 4.25% — some 25 basis points lower than current levels.
“However you slice it, whether it’s real growth, inflation expectations or term premia, the long-end is going to be pressured,” said Noel Dixon, a macro strategist at State Street who has been predicting that 10-year yields could rise above 5% in 2025.
They are factoring in not only divergent views on how fiscal policy is likely to evolve, but also the Fed’s management of its Treasury holdings. The end of the central bank’s balance sheet unwind, known as quantitative tightening, could lower bond supply and in turn boost demand.
“Even as the Fed is likely to continue lowering the policy rate, pulling front-end yields lower, many of the forces that argue for longer-term yields to remain elevated are still in place: a high neutral rate, elevated rate volatility, the inflation risk premium, and large net issuance amid price-sensitive demand,” a Barclays team led by Anshul Pradhan wrote in a note.
What Bloomberg Intelligence Says...
“A steady-state economy early in 2025 may cause the Federal Reserve to cut interest rates slowly, and potentially to only 4% on the upper bound. A major shift in the economy may be needed for the 10-year Treasury yield not to hover between 3.8% and 4.7%.”
— Ira F. Jersey and Will Hoffman, BI strategists
Then there’s the Trump tariff and tax policies that will unfold in the coming weeks that could upend Wall Street’s outlooks.
“Higher tariffs and tighter immigration controls argue for slower growth but higher inflation,” said Pradhan.
For now, Morgan Stanley and Deutsche Bank are among the most bullish and bearish views, respectively, on the bond market. Morgan Stanley sees “downside risks to growth” and an “unexpected bull market” for investors. Anticipating a speedier pace of Fed rate cuts than other banks, the firm expects the 10-year yield to fall to 3.55% next December.
At Deutsche Bank, which forecasts no Fed cuts in 2025, the team led by Matthew Raskin is looking for the 10-year yield to rise to 4.65% on strong growth, low employment and stickier inflation.
“We expect the main catalyst for our view to be a realization that inflation and labor market conditions warrant a more restrictive Fed path than currently priced,” they wrote in a note.
