Treasury scenarios for 2025: fiscal policy, inflation, and yield projection

The final countdown has begun with only two weeks left until the 2024 U.S. presidential election, and people are all in on the betting markets.

The recent presidential elections in Mexico, held on June 2, 2024, have created both uncertainty and opportunity in the bond market. Despite short-term volatility, there is a strong case for increasing exposure to Mexican sovereign bonds in local currency. Mexico benefits from a strong relationship with the United States and structural shifts like nearshoring, making it a promising landscape for fixed income investments.

As financial markets brace for the release of Japan’s April 2024 Core Consumer Price Index (CPI), expected to slow to 2.4% from March’s 2.9%, the Bank of Japan (BoJ) stands at a pivotal junction. This forthcoming data, a stark contrast to the peak of 4.3% in July 2023, highlights the complexity of the BoJ’s monetary policy landscape amid a significantly depreciated yen. The continued weakness of the yen, despite ending the world’s only negative interest rate policy in March, underscores the profound challenges the BoJ faces. This focus explores the strategic manoeuvres within the larger context of global economic pressures, examining the implications of potential policy shifts not just for Japan, but for the broader global fixed income markets.

U.S. Treasury Inflation-Protected Securities, or TIPS, stand out as a distinctive class of U.S. government bonds meticulously crafted to shield investors from the corrosive effects of inflation. While the value of traditional bonds gradually erodes due to inflation, TIPS promise a different path. Their value adjusts in harmony with the Consumer Price Index (CPI).

An opportunity or a threat? The US Treasuries market presents both challenges and opportunities for investors. Focusing on the belly of the yield curve offers attractive entry points with historically high real yields.

The UBS/Credit Suisse affair has caused the AT1/CoCo bond markets to struggle By tightening their monetary policy sharply and rapidly, central banks have highlighted certain weaknesses in our financial system: insufficient risk coverage, liquidity problems, lack of business diversification, governance issues, and now uncertainties in the treatment of hybrid instruments. After the failure of some US regional banks, the UBS/Credit Suisse affair has shaken the financial world and more particularly the specialists of a specific bond segment which weighs about 250 billion dollars: Additional Tier 1 bonds (AT1) and/or Contingent Convertible bonds (CoCos).

Like the FED last week, the ECB’s official statement met market expectations but the press conference suprised.

Instability in EMs means sovereign bonds are subject to pain in the short term.