Wall Street "agrees" with the Federal Reserve: predicts that the 2Y U.S. Treasury yield will decline by 50 basis points next year
Wall Street predicts that short-term U.S. Treasury yields will decline by 2025, with the 2-year Treasury yield expected to drop by 50 basis points. Despite the threat that Trump's policies pose to the bond market, strategists believe that the Federal Reserve will continue to cut interest rates in 2025. The latest expectations from the Federal Reserve indicate that the rate cuts may be modest, and the yield curve has risen to its highest level since June 2022. The 10-year Treasury yield is expected to fall to 4.25% by the end of 2025
According to Zhitong Finance, Wall Street is predicting that short-term U.S. Treasury yields will decline by 2025, despite the imminent threat posed by the trade and tax policies of incoming President Trump to the bond market. Strategists' forecasts are largely consistent, believing that the 2-year U.S. Treasury yield, which is more sensitive to Federal Reserve interest rate policy, will decrease. They expect that 12 months from now, rates will drop at least 50 basis points from current levels.
The JPMorgan Asset Management team, led by David Kelly, stated in the company's annual outlook: "While investors may be shortsightedly focused on the speed and magnitude of 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 a smaller rate cut next year during its meeting this month, which could complicate the yield trajectory. Currently, the median expectation among Federal Reserve officials indicates that the Fed will only cut rates by 50 basis points in 2025—roughly in line with Wall Street's forecast for a decline in the 2-year U.S. Treasury yield—but this implies a risk of a pause in the Fed's easing cycle. After Federal Reserve Chairman Powell placed the responsibility for further rate cuts squarely on inflation, the yield curve steepened to its highest level since June 2022 on Thursday, as investors reconsidered the value of holding longer-term bonds.
Raymond James senior investment strategist Tracey Manzi stated: "Given that the expected easing cycle will be shorter, the front end of the curve will follow this trend. Any steepening we see will be dominated by the long end of the curve."
The median forecast among 12 strategists is that the 2-year U.S. Treasury yield will decline by about 50 basis points to 3.75% a year from now. This rate forecast has already risen by nearly 10 basis points before the Federal Reserve released its latest economic projections last week. For the longer-term 10-year U.S. Treasury yield, strategists expect it to reach 4.25% by the end of 2025, about 25 basis points lower than current levels.
State Street macro strategist Noel Dixon stated: "No matter how you analyze it, whether from real growth, inflation expectations, or term premium, long-term Treasuries will be under pressure." Dixon has consistently predicted that the 10-year U.S. Treasury yield could rise above 5% by 2025.
They not only considered different views on how fiscal policy might evolve but also the Federal Reserve's management of its holdings of U.S. Treasuries. The central bank's end of what is known as quantitative tightening, or balance sheet contraction, could reduce bond supply and thereby boost demand The Barclays team led by Anshul Pradhan wrote in a report: "Although the Federal Reserve may continue to lower policy rates, pulling down front-end yields, many factors advocating for high long-term yields still exist: higher neutral rates, higher interest rate volatility, inflation risk premiums, and significant net issuance under price-sensitive demand."
Bloomberg analysts Ira F. Jersey and Will Hoffman stated: "If the economy stabilizes by early 2025, the Federal Reserve may slowly cut rates, potentially lowering the rate ceiling to 4%. If the 10-year U.S. Treasury yield does not hover between 3.8% and 4.7%, a significant economic shift may be required."
Next are Trump's tariffs and tax policies, which are expected to be announced in the coming weeks and may disrupt Wall Street's outlook. Pradhan said: "Higher tariffs and stricter immigration controls will lead to slower economic growth but will result in rising inflation."
Currently, Morgan Stanley and Deutsche Bank hold the most optimistic and pessimistic views on the bond market, respectively.
Morgan Stanley believes that investors will face "downside risks to economic growth" and "unexpected bull markets." The firm expects the pace of Federal Reserve rate cuts to be faster than other banks, predicting that the 10-year U.S. Treasury yield will drop 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 that under conditions of strong economic growth, low employment, and rising inflation, the 10-year U.S. Treasury yield will rise to 4.65%. They wrote in a report: "We expect the main factors contributing to our view are the recognition that inflation and employment market conditions require the Federal Reserve to adopt a stricter policy than currently priced in."