(Bloomberg) -- Interest-rate-cut bets have galvanized Treasuries in recent days but Deutsche Bank AG’s private banking arm warns that volatility is about to rise as US policymakers may ease less than traders expect.
The Federal Reserve is likely to kick off its rate-reduction cycle next week, with a total of six cuts anticipated in the year through September 2025, according to Stefanie Holtze-Jen, Asia Pacific chief investment officer in Singapore. That’s less than the roughly nine penciled in by traders, and the European lender warns the mispricing may trigger a bout of swings in the market.
The question of how much the Fed will ease has sent the US government bond market into overdrive, with benchmark yields falling for four straight months — the longest run of declines in three years. The exuberance raises the prospect of a sharp reversal should investors’ rate-cut wagers prove to be more aggressive than policymakers’ projections.
Deutsche’s private banking arm correctly predicted that the Fed would refrain from lowering borrowing costs last year — a call that seemed contrarian at that time as concerns mounted that the US economy could slip into a recession. Back then, it also forecast that the benchmark US yield may rise to 4.2% by end-2023 — a level that was reached in December last year.
“The market is due for a repricing and of course on the back of that, there will be volatility,” Holtze-Jen said in an interview. “The US economy looks like it is still on a fairly solid footing, especially from a consumer perspective. This can continue.”
Deutsche Bank sees the 10-year Treasury yield rising to 4.05% by September next year from around 3.63% now, and expects the US economy to avoid a recession. The median forecast in a Bloomberg survey of analysts is for the yield to reach 3.73% by the end of the third quarter of 2025.
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