U.S. bond investors are preparing for heightened market volatility and adopting a cautious approach to their portfolios due to the unpredictable landscape created by the Trump administration's policies and the Federal Reserve's potential for prolonged pauses in interest rate cuts. Portfolio managers are steering clear of long-term Treasury bonds and maintaining neutral positions, reflecting the uncertain outlook for interest rates in 2025.
U.S. bond investors are bracing for increased market volatility and adopting a defensive stance in their portfolios due to ongoing uncertainties surrounding the Trump administration's policies and indications that the Federal Reserve 's interest rate cuts could be on a prolonged pause. Portfolio managers are steering clear of the long end of the U.S. Treasury curve, specifically 10-year notes to 30-year bonds, ahead of a crucial Fed policy decision this week.
Many investors have also maintained a neutral position relative to their benchmarks, reflecting the clouded outlook for interest rate movements in 2025.The Federal Open Market Committee, the U.S. central bank's policy-setting body, is widely expected to maintain its benchmark overnight interest rate in the range of 4.25% to 4.50% at the conclusion of its two-day policy meeting on Wednesday. Fed Chair Jerome Powell is anticipated to strike a cautious tone during his post-meeting press conference, keeping the central bank's options open to allow policymakers sufficient time to assess the potential impact of President Donald Trump's administration on the fiscal landscape. There is limited urgency for the Fed to implement easing measures given the relative strength of the U.S. economy and the labor market. However, a risk persists that inflation, while showing signs of deceleration, could re-accelerate due to broad tariffs that could be imposed on a substantial number of imported products, coupled with deportations of undocumented immigrants, potentially leading to a surge in wage pressures. 'I would think that adding duration into the unknown is probably a bad idea, especially as we have no clue what’s going to happen over the next year,' stated Byron Anderson, head of fixed income at Laffer Tengler Investments in Scottsdale, Arizona. Investors exhibited a tendency to extend duration, or purchase longer-dated assets, last year when they anticipated the Fed would engage in a more substantial rate-cutting cycle. Historically, longer-dated notes and bonds have outperformed shorter-duration assets such as cash and Treasury bills during easing periods. This month, however, as the 10-year yield reached a 14-month high of 4.809%, active investors have been adding duration, according to the latest JP Morgan’s Treasury Client Survey, which revealed the highest net long positions since December 2nd. The survey also indicated an increase in the number of bond investors with neutral positioning relative to their benchmark by three percentage points since the first week of January. Overall, the survey demonstrated a greater prevalence of neutral positioning compared to long positions. 'We are pretty close to neutral duration. A lot of our overweights are in that three- to five-year part of the curve, less in 10s,' said Mike Sanders, portfolio manager and head of fixed income at Madison Investments in Madison, Wisconsin. 'I don’t see the Fed being able to aggressively cut more than twice this year ... unless there is a pretty bad slowdown, which we don’t think is the case right now.' A sell-off in technology stocks on Monday sent ripples through the bond market, triggering a multi-week decline in Treasury yields and prompting the U.S. rate futures market to factor in two rate cuts of 25 basis points (bps) this year. The market had only anticipated one rate reduction throughout the month until Monday. The Fed's own rate forecast, released in December, projected two quarter-percentage-point cuts next year, with the benchmark lending rate concluding 2025 in the range of 3.75% to 4.00%. A burgeoning U.S. fiscal deficit has further dampened investor appetite for the long end of the yield curve. The U.S. deficit has doubled, escalating from 3.1% of gross domestic product in 2016, just before Trump's first term, to over 6% of GDP in 2024. 'We have much less conviction and are underweight on the long end of the curve because that is where the risk on fiscal policy is, especially with the amount of issuance,' said Brian Ellis, portfolio manager on the Broad Markets Fixed Income team at Morgan Stanley Investment Management in Boston. 'And this issuance has to be taken by price-sensitive buyers.' Laffer Tengler’s Anderson estimated approximately $14.6 trillion in Treasuries, encompassing both short and long maturities, would enter the market over the next two years. However, the primary bond purchaser in the market - the Fed - is unlikely to absorb the majority of this influx. This could potentially drive Treasury yields even higher, analysts suggest. 'The market has been more focused on fiscal policy. It’s front and center, and the reaction to monetary policy is a residual piece of the puzzle,' said Guneet Dhingra, head of U.S. rates strategy at BNP Paribas in New York. 'It’s a good time to be neutral in the Treasury market right now because the uncertainty level is extremely high. I don’t think there is much to fall back on to have conviction.
INVESTING U.S. BONDS VOLATILITY FEDERAL RESERVE INTEREST RATES FISCAL POLICY TRUMP ADMINISTRATION
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