(Bloomberg) — Bond traders have rarely suffered much from a Fed easing cycle. Now they fear 2025 threatens more of the same.
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US 10-year bond yields have risen more than three-quarters of a percentage point since central bankers began cutting benchmark interest rates in September. It’s a counterintuitive and loss-making response, marking the biggest jump in the first three months of an interest rate-cutting cycle since 1989.
Last week, even as the Federal Reserve cut interest rates for the third straight time, 10-year Treasury yields rose to a seven-month high after policymakers led by Chairman Jerome Powell signaled they were ready to significantly slow the pace of monetary easing in… Next year.
“Treasuries have been repricing on the idea of a longer rally and a more hawkish Fed,” said Sean Simcoe, global head of fixed income portfolio management at SEI Investments Co. He sees the trend continuing, led by rising long-term yields.
The rise in returns confirms the distinctiveness of this economic and monetary cycle. Despite rising borrowing costs, the resilient economy has kept inflation above the Fed’s target, forcing traders to back off bets on aggressive cuts and abandon hopes of a broad rise in bonds. After a year of sharp ups and downs, traders are now awaiting another year of disappointment, with Treasuries as a whole barely breaking even.
The good news is that a popular strategy that has worked so well over past easing cycles has gained renewed momentum. The trade, known as steepening the curve, is a bet that the Fed’s sensitive short-term Treasuries will outperform their longer-term counterparts — which is generally what has happened recently.
“pause phase”
Otherwise, the forecast is difficult. Not only do bond investors have to contend with a Fed that is likely to stay in place for some time, they also face potential disruptions from the incoming administration of President-elect Donald Trump, who has vowed to reshape the economy through policies ranging from trade to immigration. Which many experts see as inflationary.
“The Fed has entered a new phase of monetary policy — the pause phase,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “The longer this lasts, the more likely it is that markets will have to equally price a rate hike versus a rate cut. Policy uncertainty will increase volatility in financial markets in 2025.”
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