Suddenly, Investors Are Now Skeptical About Bond Market Recovery In 2025
Investors are currently not willing to bet on an imminent bond market rebound...
Bond traders have lowered their expectations for U.S. Treasuries at the start of the new year, as the resilience of the U.S. economy and President-elect Trump's tax cut and tariff policies continue to put pressure on U.S. debt.
Strong economic data, the Republican sweep under Trump, and cautious remarks from Federal Reserve officials have triggered a downturn in the U.S. bond market, with investors readjusting their expectations for the Federal Reserve. The U.S. government is set to issue $119 billion in new bonds this week, causing unease in the market.
On Monday, the U.S. will issue $58 billion in three-year Treasury notes, followed by the auction of 10-year and 30-year Treasury bonds on Tuesday and Wednesday, respectively. Due to the state funeral for former President Carter on Thursday, this round of U.S. Treasury auctions has been moved up by one day.
This adjustment has hit longer-dated U.S. Treasuries the hardest, with the benchmark 10-year U.S. Treasury yield rising to over 4.6%, about one percentage point higher than when the Federal Reserve first began easing monetary policy in September. The 30-year U.S. Treasury yield once rose to 4.85%, the highest level since the end of 2023.
The two-year U.S. Treasury has shown milder fluctuations, reflecting investors' shift towards bonds more affected by the Federal Reserve's policy rates.
JPMorgan Asset Management portfolio manager Priya Misra said, "There is a lot of concern about inflation (tariffs, fiscal stimulus, immigration) and some optimism about growth (fiscal stimulus, deregulation), which explains the move in rates over the last few months."
The bearish bond market outlook marks a shift from the beginning of 2024 when many on Wall Street expected a strong year for the bond market once the Federal Reserve began to lower rates from their two-decade highs.
However, these expectations proved premature, and investors are now unwilling to bet on a bond market rebound as the economy continues to grow. Meanwhile, Trump's tax cut and tariff plans could exacerbate inflationary pressures by increasing fiscal stimulus and raising import prices. Increased deficits could also lead to a higher supply of U.S. debt.
Brandywine Global Investment Management portfolio manager Jack McIntyre said that holding short-term U.S. Treasuries is "not a bad approach right now". He said: "Until you see the pain in the economy, even though yields have come up quite a lot, it's just better to keep the powder dry."
Currently, futures traders expect the Federal Reserve to keep rates unchanged until June and may only cut its benchmark rate by another 50 basis points throughout 2025.
Institutions point out that if Trump delivers on the content outlined in his social media posts, this will stimulate a sell-off in U.S. Treasuries. However, any surge in yields could be limited to within 30 basis points, keeping yields below 5%.
On Friday, the U.S. Department of Labor will release the latest non-farm employment report, which is expected to show an increase of 160,000 jobs in December, a slight decrease from the previous month's increase of 227,000. Given the significant rise in U.S. Treasury yields, JPMorgan's Misra said that a surprise slowdown in job growth could lead to a rebound in U.S. Treasury prices.
She said, "A weak number will bring talk about a March Fed rate cut back on the table."