Is the Treasury sale over? Capital Economics weighs in on Investing.com

Investing.com – While US Treasury yields are expected to decline through the remainder of 2025, interest rates may continue to rise, according to analysts at Capital Economics.

The benchmark 10-year US government bond recently touched multi-month highs as investors fretted over the prospect of the Federal Reserve cutting interest rates this year.

After lowering borrowing costs by a full percentage point through 2024, policymakers have signaled that they will take a cautious approach to future challenges, especially as uncertainty surrounds the policies of the incoming President’s administration. elected Donald Trump. Economists have warned that Trump’s plans, particularly his threat to impose foreign tariffs on allies and rivals alike, could put renewed pressure on inflation – and subsequently bolstered the case for for the Fed to taper off slowly, if at all.

But these concerns were somewhat alleviated on Wednesday due to the December figure for consumer price growth. The data showed that while US consumer prices rose as expected in December, a key measure that removes volatile items such as food and fuel rose at a slower pace in more than expected.

The Fed may choose to cut rates several times by the end of the year were boosted after Wednesday’s data release, and remained in play despite some solid economic indicators. later in the week.

Treasury yields, which tend to move inversely to prices, fell in response.

“Selling of Treasury products has turned into the back half this week,” analysts at Capital Economics said in a note to clients on Friday.

But they noticed that this method was mainly focused on the end of the long product life. This has led to a “significant” stability, analysts said, adding that this “suggests to us that the near-term expectations of monetary policy – which in principle should affect straight into short-term bond products –haven. I’ve been in the driver’s seat lately.”

This so-called “bear steepening”, in which long-term yields rise more than short-term ones, has left the bond market in “unusual territory” compared to past Fed tapering cycles. .

They argued that the next move for bonds can be solved by two key questions: What caused the long-term yield to increase so much, and how likely is it to start again?

One possible explanation for the rise in Treasury term premia — bond investors need to bear the risk that interest rates may change over the life of the bond — is that investors are bracing for uncertainty during the Trump administration. , analysts said.

However, while they point out that the size seems to depend on how Trump’s policies continue in the next few years, “all the signs are visible to us, pointing to slightly weaker products. “

Their forecast is for the end of 2025 at 4.50%, which is about 10 basis points lower than its current level, while the reduction of the front part of the gap seems to be “more pronounced. “