Wall Street Strategists Stick to Neutral Stance on US Treasuries

Carter Johnson
·5-min read

(Bloomberg) -- Wall Street strategists are holding tight to neutral recommendations in the Treasury market amid competing forces of Donald Trump’s presidential victory and the Federal Reserve’s path toward lower interest rates.

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Citi, JPMorgan and Morgan Stanley strategists are neutral on bond duration in the wake of the US election, even as they expect Trump’s potential economic policies — from tariffs to tax cuts — to likely spur inflation in 2025.

“The rates market is caught between expectations of significant policy changes in 2025 and the easing cycle which is driven by near-term data,” wrote Citi’s Jabaz Mathai and Alejandra Vazquez. “We don’t see an imperative to take outright duration risk at these levels.”

Strategists are now looking to a reading of October inflation data on Wednesday for further clues on the pace of easing. Traders in the swaps markets are pricing in more than a 50% chance of a quarter-point cut in December, though BMO Capital Markets strategists are looking to fade any selloff in January fed funds futures should the monthly CPI figure come in stronger-than-expected. Cash trading of Treasuries is closed Monday because of a US holiday.

Here’s a roundup of views from Wall Street strategists. For a roundup of views on European rates, click here.

  • Barclays (Anshul Pradhan and others, Nov. 7 report)

    • Turns neutral on recommendations to position for higher rates, including paying 5y5y USD versus EUR

    • Yields on 10-year Treasuries to remain around 4.25% to 4.50% range, but investors will demand higher term premium

    • “A Republican sweep, if realized, argues for higher term premium due to higher uncertainty about the economic outlook and the policy path, as well as higher inflation risk premium and finally due to higher supply to bond investors”

  • BMO Capital Markets (Ian Lyngen and Vail Hartman, Nov. 8 report)

    • Looks to fade any selling in January fed funds futures (FFF5) if core-CPI figures Wednesday comes in around 0.3% to 0.4% (Bloomberg consensus is 0.3% month-over-month)

    • “After the calendar turn into 2025, the monetary policy outlook will become far more data dependent, and we suspect that January is the soonest monetary policymakers would be willing to skip a meeting if the data deems it necessary”

  • Citi (Jabaz Mathai and Alejandra Vazquez, Nov. 8 report)

    • Sees no imperative to take duration risk at current levels

    • “Rates are currently in the middle of two opposing forces – the likely Republican sweep of government (House races still being called and leaning towards a Republican majority at this point) pushing rates higher on deficit worries; and a Fed that is guiding towards further rate cuts, which acts as a headwind against higher rates in the near term”

    • Powell’s guidance suggested cut in December but Fed’s data dependence has proved short-term; is paid Dec FOMC OIS as “a cheap option on stronger CPI”

  • Goldman Sachs (William Marshall and others, Nov. 8 report)

    • “With a broadly firm underlying growth backdrop supported by ongoing Fed cuts, and fiscal policy likely to be modestly more expansionary than our prior baseline (something that we see as consistent with ongoing upward pressure on yields over the medium term), we do not see an especially strong case for a significant move lower in long-end yields either (assuming a Republican sweep is ultimately realized”

  • JPMorgan (Jay Barry and others, Nov. 8 report)

    • Is neutral on duration following election but recommends holding 50:50 weighted 2s7s30s belly-richening butterflies “as a low-beta way to position for lower yields”

    • Raises yield forecasts on expectation Fed will dial back cuts in 2025; now sees Q2 2025 10-year yield at 4.15%

    • Argues Trump win should lead to more anchored Treasury yields because:

      • Higher rates volatility could lead to higher term premium

      • Red Sweep raises likelihood of fiscal expansion

      • Treasury market will grow more than demand from “price insensitive” investors including Fed, US banks, foreign investors

  • Morgan Stanley (Matthew Hornbach and others, Nov. 8 report)

    • “We maintain a neutral stance on US Treasury duration in anticipation of a ‘buy the dip’ opportunity – catalyzed by better economic data and less investor certainty over Fed policy into year-end”

    • Looks to relative value trades biased towards higher yields: Recommends investors pay belly of a 50:50 weighted 2s3s30s SOFR swap fly

  • Societe Generale (Subadra Rajappa and others, Oct. 7 report)

    • Expects 10-year yield to remain in 4.0% to 4.50% range and investors to wait out volatility before re-entering longs

    • “While the initial market reaction post US elections was for higher yields, steeper curves, and higher inflation expectations, we do not expect this to continue. Markets are likely to stabilize as we await clarity on policies”

  • TD Securities (Gennadiy Goldberg and others, Nov. 8 report)

    • Remains in 5s30s steepener and expects 10s could test 4.75% in near-term; still, sees duration dip buyers materializing

    • After election and November FOMC, sees Fed cutting once more in December, then pausing rate cuts until 2H 2025

    • “Given the stronger economic data in the past few months and increased uncertainty about the impact of tariff and immigration policy in the upcoming Trump administration, the Fed can begin to signal the possibility of a ‘pause’ or ‘skip’ to cuts”

  • Wells Fargo (Michael Schumacher and others, Nov. 8 report)

    • Evolution of yields and curve will depend on House results; a “functional majority” of a greater-than-eight seat GOP lead in House should drive tax cuts, deficit growth and steepening of long-end 10s30s

    • Conversely, should GOP not reach this threshold Treasuries should rally “significantly” and five-year yield could fall below 3.80%

    • Ahead of October CPI, “we expect the rates market to be slightly more sensitive to softer data”

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