The second and final Federal Reserve cut will result in US bond rates of 4.3% in 2024.

The return of Donald Trump to the White House will have consequences for the evolution of macroeconomic data and, in turn, will determine the plans of the US Federal Reserve. Jerome Powell’s 25 basis point cut this week was more than discounted by the market, regardless of who won the US election. But from now on, waiting Where will the benchmark price be in dollars? They became even more unstable.

All indications are that US rates will jump to the current 4.75% next year, according to financial instruments. swaps OIS (overnight index swaps used as a hedge against changes in short-term interest rates and to predict where central bank links will be in the short to medium term). “The following data will not take much time. inflation will suspend the Federal Reserve in December,” commented AXA IM chief analyst Gilles Moec. The flexibility planned by the market for 2025 has also changed. While at the end of last week a decline of up to 125 basis points was expected for December 2025 (including this Thursday’s adjustment), it is now forecast that rates will close next year at 4%, 25 basis points higher than expected at the end of last week.

From the very beginning, it was assumed that Donald Trump’s policies would lead to increased inflation in the US economy. The most glaring example would be a tariff war with countries like China, similar or even larger than the one seen during the Republican tycoon’s previous term. And the thing is that US Federal Reserve faces the risk of price increases when they have not yet reached their target target to contain inflation (headline CPI) at 2%. All this caused a build-up in the secondary debt market, where the yield on sovereign bonds increased again. That is, bond prices fall, even though the theory is that in times of falling interest rates, prices should rise and generate profits for investors.

But that’s not what happened to date. Sovereign bond yields have risen across most of the curve, especially those with maturities greater than two years. An example is The US ten-year bond rate exceeded 4.4% this week, after falling below 3.6% in September. Finally, it closed below 4.3% this week. “Bonds’ reaction to the Fed’s changes was positive, resulting in a pause in the upward trend in yields seen last month,” explains Eric Mueller, chief strategy officer at Muzinich & Co.

Now awaiting market consensus, which reflects Bloomberg moderates the yield of debt securities for 2025. At the moment, there is a clear difference between the current US 10-year yield (at 4.27%) and the expected average for the fourth quarter of 2024, which is 3.89%. He the difference is more than 40 points If it doesn’t close, it will mean higher rates than what the market is expecting today. “In a scenario where Trump governs by controlling the chambers, we foresee a strong rise in rates and yields, so it would be unwise to have a longer duration because losses could occur,” commented experts from debt agency HSBC.

As we move towards 2025, the expected returns on these government debt securities will in turn see a more moderate decline in their yields, given that The year is expected to end with a profit margin of 3.66%. (almost 70 basis points difference from current secondary market levels). That is, market expectations of what interest rates will be in the United States coincide with the expected evolution of sovereign bonds.

This new, more inflationary environment with US consumer price index remains above 2% This also influences the strategies of investment managers and banks, especially when determining what length of debt provides the best opportunity for an investor. “We continue to refrain from extending the maturity period excessively. While current levels offer investors the opportunity to gradually reduce reinvestment risks, this does not require very long maturities,” comments Swiss private banker Julius Baer.

Another example is the Buy & Hold company. The company’s CEO and bond manager, Rafael Valera, said now is not the time to change strategy as the firm has done. “We do not believe that taking on more duration risk is currently sufficiently rewarded, quite the contrary,” Varela comments. In Buy & Hold they explain that their most conservative investment grade fund has a duration of around two years with a yield of around 4%, while their flagship fund with a maturity of 3.3 years offers a yield of over 6%. That is, They prefer to improve credit quality portfolios and their diversification, but not duration.

Lagarde separates his path from Powell

The European debt market was also driven by the US elections and their outcome. In fact, the eurozone could fall victim to the tariffs Trump might propose over the next four years. However, market forecasts for what interest rates will be in the eurozone in 2025 have not changed, as is the case in the United States. swaps

OIS will place the type ECB deposit line at 2% in September next year.

There will be a reduction of 125 basis points with the possibility even attend a 150 point cutin accordance with Bloombergwhich were not considered in the eurozone until the US elections. Overall, 10-year German bonds are below 2.4%, while Spanish bonds with the same maturity are again at 3.1%.