Where will bonds go in 2025? It depends on these two factors that should be monitored carefully.
The past year has been characterized by a series of very pronounced swings in the bond markets, with the long-term US Treasury sector alternating between bullish and bearish phases.
The 2025 forecasts predict another equally complex year and many are wondering what it makes sense to expect from the fixed income securities market.
To answer this question, there are two variables in play that could be decisive.
The performance of the labor market and tariff policies.
The impact of the labor market on bonds
It remains a fact: a rise in unemployment could induce the Federal Reserve to cut interest rates further. In 2024, the Federal Reserve had to revise its monetary policy expectations several times due to the variability of the labor market data.
Although initially expected to see stable growth, rising unemployment in some quarters has raised doubts about the solidity of the United States economy. Just think of August, when a different-than-expected unemployment rate caused one of the most unexpected crashes in the last two years, with the S&P500 falling more than 10%. So what to expect in 2025? In December, the Fed estimated an unemployment rate of around 4.2-4.3% for the next three years.
So, if unemployment were to rise above 4.4%, one could expect a positive impact on long-term bonds, as the Fed could accelerate interest rate cuts to stimulate economic growth.
From Tariff Policy to Inflation
Another key driver of the bond outlook is tariff policy, particularly the US administration’s decisions regarding trade tariffs.
The introduction of new tariffs, particularly against China, could have two opposing effects. In the short term, inflation could rise as import costs rise, while in the long term, if tariffs were to reduce consumer spending and slow economic growth, deflationary pressures could emerge, prompting the Fed to cut rates to stimulate the economy.
On January 20, Donald Trump will return to the White House, and the size of these tariffs will likely be the focus of media attention; an element on which traders could base their investment decisions. Depending on mass expectations, the market could discount either a short-term rate hike to contain inflation, or a reduction due to fears of new deflationary pressures.
Original article published on Money.it Italy 2025-01-07 17:45:23. Original title: Obbligazioni, le previsioni 2025. Occhio a questi 2 fattori
