(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.
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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.