Expectations for a pause in interest rate cuts next year are rising, with long-term U.S. Treasury bonds experiencing five consecutive declines, facing the worst week of the year
The 30-year U.S. Treasury yield recorded its largest weekly increase this year, while the 10-year Treasury yield surpassed the 3-month Treasury yield for the first time since 2022, ending the inversion
This week, the U.S. Treasury market faced selling for the fifth consecutive day, with the 30-year Treasury yield recording the largest weekly increase this year.
As the market anticipates that the Federal Reserve will soon slow down its rate hikes, and may even pause rate cuts next year, the 30-year U.S. Treasury yield climbed to 4.61% on Friday, up about 28 basis points from the previous week.
Additionally, the weak demand at Thursday's 30-year Treasury auction further pushed up yields, bringing them close to November's highs.
Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, stated on Bloomberg Television that yields are "pricing in a market where the Federal Reserve will temporarily hold steady":
"The economy is in good shape, and inflation, if there is any, is rising."
The yield curve inversion has finally "unwound." Will the Federal Reserve "take action" next year?
Compared to short-term Treasuries, the 10-year Treasury yield performed more strongly, rising by 25 basis points to 4.40%, surpassing the 3-month Treasury yield for the first time since 2022.
The yield difference between the 3-month and 10-year Treasuries is an important indicator for investors observing the Federal Reserve's policy expectations. Duke University professor Campbell Harvey, who once "proposed that yield curve inversion has predictive qualities," stated that an inverted yield curve indicates that the Federal Reserve should respond to the risk of economic recession by cutting rates.
However, the inversion has "unwound." Therefore, while the market generally expects the Federal Reserve to cut rates by 25 basis points in December and then twice in 2025, some economists hold a different view.
Economists from Deutsche Bank and BNP Paribas predict that the Federal Reserve will not take action in 2025. BNP Paribas also expects that the Fed's actions next week will be accompanied by hawkish language, suggesting that there may not be further rate cuts in the future. The bank also forecasts that the 10-year U.S. Treasury yield will rise to 4.65% by 2025.
Jason Pride, Head of Investment Strategy and Research at Glenmede, stated:
"Ideally, the Federal Reserve would cut rates at the December meeting and then pause in January."
He believes that next year the Federal Reserve will decide between two to four rate cuts, but "there is a lot of debate around inflation concerning the next government's tariffs and immigration policies."
However, it is worth noting that activity in the interest rate futures market shows that some traders expect an unexpected rate cut early next year. Recent positioning data indicates that new long positions have been established in February federal funds futures, anticipating 25 basis point cuts in both December and January