Wall Street Bets on Lower US Bond Yields in 2025, Despite Trump Uncertainty

Wall Street expects lower US bond yields in 2025, despite uncertainty around Donald Trump's potential policy impact, reports Bloomberg.

Strategists, in their annual outlooks, are forecasting a significant drop in short-term Treasury yields, particularly the two-year note, aligning with the Federal Reserve's current stance. This consensus view anticipates a decline of at least half a percentage point from current levels within the next 12 months.

"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," states a JPMorgan Asset Management team led by David Kelly, in the firm's annual outlook.

However, the Fed's recent signaling of a slower pace of rate cuts, with a median forecast of just half a point of cuts in 2025, could complicate this trajectory. This uncertainty stems from Chair Jerome Powell's emphasis on inflation as the primary driver for further rate reductions, leading to a steepening of the yield curve this week as investors reassessed their appetite for longer-term debt.

"With the outlook for a shallower easing cycle, the front-end of the curve will track that," says Tracey Manzi, a senior investment strategist at Raymond James, to Bloomberg. "Any steepening that we get will be led by the long-end of the curve."

The median forecast among 12 strategists points to a 50 basis point decline in the two-year note yield, settling at 3.75% a year from now. For longer-term 10-year Treasuries, strategists see the yield, currently around 4.52%, ending 2025 at 4.25%, approximately 25 basis points lower.

However, analysts acknowledge significant uncertainty surrounding these forecasts, given the potential impact of Trump's trade and tax policies.

"Higher tariffs and tighter immigration controls argue for slower growth but higher inflation," notes Anshul Pradhan, a macro strategist at State Street, to Bloomberg.

There is also uncertainty surrounding the Fed's management of its Treasury holdings and the potential impact of quantitative tightening on bond supply and demand.

Despite these uncertainties, the consensus among Wall Street strategists is that short-term US bond yields will trend downwards in 2025, albeit at a potentially slower pace than initially anticipated.