The Federal Reserve is likely to start cutting interest rates next week, but the extent of easing may disappoint investors, according to Deutsche Bank. This mismatch in expectations could trigger volatility in the US government bond market.
Stefanie Holtze-Jen, Deutsche Bank’s Asia Pacific chief investment officer, predicts six rate cuts through September 2025, less than the nine cuts currently priced in by traders.
The anticipation of Fed rate cuts has fueled a rally in US Treasuries, with yields on the benchmark 10-year note falling for four consecutive months, the longest streak of declines in three years. However, Deutsche Bank warns that this exuberance could lead to a sharp reversal if the Fed’s actions fall short of market expectations.
Deutsche Bank’s private banking arm has a track record of accurate predictions, having correctly forecasted that the Fed would hold rates steady last year and that the 10-year Treasury yield would reach 4.2% by the end of 2023.
“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. She believes the US economy remains resilient, particularly due to strong consumer spending.
Deutsche Bank expects the 10-year Treasury yield to rise to 4.05% by September next year, while the median forecast in a Bloomberg survey is for the yield to reach 3.73% by the end of the third quarter of 2025.
