Wall Street agrees with the Federal Reserve: Predicting that the 2-year US Treasury yield will fall by 50 basis points next year.

Wall Street is predicting that short-term US Treasury yields will fall in 2025, despite the imminent threat posed by President-elect Trump's trade and tax policies to the bond market. Strategists' forecasts are largely aligned, expecting the 2-year US Treasury yield, which is more sensitive to Federal Reserve rate policy, to decline. They predict that rates will drop at least 50 basis points from current levels within the next 12 months. Morgan Stanley's asset management team, led by David Kelly, stated in the company's annual outlook, "While investors may be narrowly focused on the speed and extent of rate cuts next year, investors should step back and realize that the Fed will still be in easing mode in 2025." However, the Fed hinted at a smaller rate cut next year at its meeting this month, which may complicate the trajectory of yields. Currently, the median forecast among Fed officials shows a 50 basis point rate cut in 2025, roughly in line with Wall Street's forecast for a decline in the 2-year US Treasury yield. But this suggests the risk of a pause in the Fed's easing cycle. After Fed Chairman Powell passed on further rate cuts solely to inflation, yields spiked on Thursday to their highest level since June 2022 as investors reconsidered the value of holding longer-dated bonds. Tracey Manzi, senior investment strategist at Raymond James, said, "Given expectations for a shorter easing cycle, the front end of the curve will follow this trend. Any steepening we see will be driven by the long end of the curve." The median forecast of 12 strategists is that the 2-year US Treasury yield will fall by about 50 basis points to 3.75% in one year. This rate forecast has already climbed nearly 10 basis points before the Fed's latest economic projections last week. Strategists expect the 10-year US Treasury yield to reach 4.25% by the end of 2025, about 25 basis points lower than current levels. Noel Dixon, macro strategist at Wells Fargo, said, "Regardless of how you analyze it, long-term bonds will come under pressure, whether from actual growth, inflation expectations, or term premiums." Dixon has been forecasting that the 10-year US Treasury yield could rise to more than 5% by 2025. They have considered different views on how fiscal policy might evolve, as well as the Fed's management of its holdings of US Treasuries. Ending asset balance sheet shrinkage, known as quantitative tightening by the central bank, could reduce bond supply and boost demand. A report from Barclays led by Anshul Pradhan stated, "Although the Fed may continue to lower policy rates, pushing down yields at the front end, many factors supporting high long-term yields remain: a higher neutral rate, higher rate volatility, inflation risk premiums, and a large net issuance under price-sensitive demand." Bloomberg analysts Ira F. Jersey and Will Hoffman said, "If the economy is stable by early 2025, the Fed may slowly lower rates, possibly dropping the upper limit to 4%. Economy shifts could be necessary if the 10-year US Treasury yield does not hover between 3.8% and 4.7%." Next up are Trump's tariff and tax policies, which may be announced in the coming weeks and could disrupt Wall Street's outlook. Pradhan said, "Higher tariffs and stricter immigration control will slow economic growth but push up inflation." Currently, Morgan Stanley and Deutsche Bank hold the most optimistic and most pessimistic views, respectively, on the bond market. Morgan Stanley believes that investors will face "downside risks to economic growth" and an "unexpected bull market." The company expects the pace of Fed rate cuts to be faster than other banks, thus predicting the 10-year US Treasury yield to fall to 3.55% by December next year. Deutsche Bank, on the other hand, predicts that the Fed will not cut rates in 2025. The team led by Matthew Raskin expects the 10-year US Treasury yield to rise to 4.65% in the case of strong economic growth, low unemployment, and escalating inflation. They wrote in a report, "We expect the main driver behind our view is the recognition that inflation and the state of the job market will require the Fed to adopt a tighter policy than currently priced in."