Deutsche Bank warns market is too optimistic about Fed rate cut, volatility risk to rise

Smart Trend Finance App noticed that the bet on rate cuts has boosted U.S. Treasuries in recent days, but Deutsche Bank's private bank warned that volatility is about to rise as the U.S. policymakers' easing may be less than traders expect.

Stefanie Holtze-Jen, chief investment officer for Deutsche Bank's private bank in Singapore and across Asia-Pacific, said the Federal Reserve is likely to start a rate-cut cycle next week, with a total of six cuts over the year to September 2025, fewer than the roughly nine traders expect, Deutsche Bank warned, saying mispricing could trigger a bout of market volatility.

The question of how much monetary policy the Fed will loosen has sped up the U.S. bond market, with benchmark yields falling for four straight months — the longest such streak in three years — and if investors' rate-cut bets prove more aggressive than policymakers' expectations, the optimism increases the risk of a sharp reversal.

Last year, Deutsche Bank's private bank correctly predicted the Fed would not cut borrowing costs — a bet that seemed contrary to market expectations at the time as fears grew that the U.S. economy could be headed for recession. The bank also accurately predicted that the benchmark 10-year U.S. Treasury yield would hover around 4.2% by the end of 2023, the level it reached in December.

Holtze-Jen said: "The market will see repricing, and of course there will be volatility after that. The U.S. economy still looks to be on a fairly solid footing, especially from a consumer perspective. That can continue."

Deutsche Bank expects the 10-year U.S. Treasury yield to rise to 4.05% by September next year from around 3.63% now, and expects the U.S. economy to avoid recession. Analysts polled by the institution expect the 10-year yield to be 3.73% by the end of the third quarter of 2025, according to the median forecast.