Deutsche Bank warns that the market's expectations for a rate cut by the Federal Reserve are overly optimistic, and volatility risks will rise
Deutsche Bank warns that the market's expectations for the Fed rate cut are overly optimistic, and predicts an increase in volatility. The US bond market is accelerating due to rate cut bets, with the 10-year Treasury yield falling for 4 consecutive months. Deutsche Bank expects the Fed to cut rates 6 times, lower than the market's expectation of 9 times, which could lead to a significant market reversal. Analysts forecast that by 2025, the 10-year Treasury yield will reach 3.73%
Zhitong Finance APP noticed that in recent days, the bet on interest rate cuts has stimulated U.S. Treasuries, but Deutsche Bank's private banking division warned that volatility is set to rise as the degree of easing by U.S. policymakers may be lower than traders' expectations.
Stefanie Holtze-Jen, Chief Investment Officer for Asia Pacific at Deutsche Bank Singapore, stated that the Federal Reserve may kick off a rate-cutting cycle next week, with a total of 6 rate cuts expected by September 2025. This is fewer than the approximately 9 cuts expected by traders, and Deutsche Bank warned that mispricing could trigger a round of market volatility.
The question of how much monetary policy easing the Federal Reserve will undertake has sent the U.S. bond market into overdrive, with benchmark bond yields falling for 4 consecutive months - the longest continuous decline in 3 years. If it turns out that investors' bets on rate cuts are more aggressive than policymakers' expectations, this optimism increases the likelihood of a significant market reversal.
Last year, Deutsche Bank's private banking division correctly predicted that the Federal Reserve would not lower borrowing costs - at the time, this forecast seemed contrary to market expectations as concerns about a potential U.S. economic downturn intensified. The institution also accurately predicted that by the end of 2023, the benchmark 10-year U.S. Treasury yield could hover around 4.2%, a level reached last December.
Holtze-Jen stated in an interview: "The market is poised for repricing, and of course, there will be volatility thereafter." "The U.S. economy still appears to be on a fairly solid footing, especially from the perspective of consumers. This situation can continue."
Deutsche Bank expects the 10-year U.S. Treasury yield to rise from the current around 3.63% to 4.05% by September next year, and anticipates that the U.S. economy will avoid a recession. The median forecast from analysts surveyed by the institution is that by the end of the third quarter of 2025, analysts generally expect the 10-year U.S. Treasury yield to reach 3.73%