2025 will probably be characterised by significant volatility in the rates space as market participants come to terms with a Trump 2.0 World. It will still be several more weeks before Trump gets inaugurated on 20 January. The sequencing and magnitude of the changes he intends to enact would have different impact on global rates. Between tax cuts and tariffs, there is plenty for investors to chew on. Moreover, there would be nuances as to how different central banks adjust to these new impulses. Below, we discuss some of the relevant themes that will be in play this year.  

Trump risks embed into rates

Inflation expectations bottom – Inflation has cooled off significantly across much of the DM space. This is the pretext for central banks to lower interest rates. However, we note that base effects would no longer be favourable going forward and there is sticky inflation to consider. Moreover, the prospect of further tariffs and other trade frictions could well return in 2025, perhaps more so with Trump back at the helm. In the absence of a recession, the risks to breakevens may be to the upside.

Resilient growth outlook – Market participants have wrongly bet on a global / US recession several times over the past few years. In each instance, the global economy, excluding China, has proven to be surprisingly resilient despite elevated interest rates. The US is not showing signs of slowing. Moreover, there are perceived upside growth risks with Trump’s victory. More corporate tax cuts may be in the offing. We also note that the Chinese economy may make a cyclical turn in 2025 if the fiscal stimuli prove to be successful. The rise in term premium in the UST curve reflects an improved growth outlook. However, at current levels, as markets factored in the Red Sweep, we think a fair amount of optimism may already be in the price.

Bond vigilantes lurk – Concern on USD assets including US Treasuries is likely to be a recurring theme. There appears to be no political will to fix the US budget position and the fiscal deficit would likely run at 5-6% of GDP even if the economy stays strong. The bias to the deficit is probably tilted wider with Trump back as President. Confidence in USD assets could erode on wide fiscal deficits and / or any kind of threat to central bank independence. We also note that de-dollarization may be a critical theme as asset managers diversify holdings to avoid getting caught if the USD gets weaponised. Investors may well demand a larger yield premium to hold USTs if the USD starts losing some of its allure as a store of value. Implied real 10Y yields of 2-2.5% would probably pass for investor expectations of a firm US economy. However, if the implied 10Y real yield widens beyond 2.5%, it could well signal investor unease over the sustainability of the US’s fiscal position. Manifestation of fiscal stress is not confined to higher nominal / real yields. We note that the UST-Swap spread (SOFR less yield) has turned even more inverted over the past few months. Similarly in the Eurozone, worries about increased Bund issuances have flipped the Bund-swap (yield less ESTRON) negative. For an extended period, this spread was positive amidst the shortage of Bunds. Taken together, we wary of ultra-long tenor govvies (>10Y) as bond vigilantes could step in to check excessive fiscal looseness.



Policy normalisation will get complicated as Trump introduces new policies. For much of the G10, normalisation means lower policy rates. Seven out of ten have already cut rates in 2024 and further cuts are likely forth coming given that policy settings are still restrictive. That said, the pressure to cut differs for each central bank. Right now, the BOC, RBNZ and the ECB appear to have the most compelling cases for an extended easing cycle heading well into 2025. If Trump introduces more protectionist measures, some DM central banks may be biased to be even more dovish. However, that is not the case for the Fed as US data proved surprisingly resilient. The risk is that the Fed would ultimately deliver a shallower cut cycle than currently anticipated. On the other end of the spectrum, normalisation means higher rates for the BOJ. Although political uncertainties (the LDP coalition has lost its majority) would mean that the BOJ is biased to be more cautious, we note that excessive yen weakness would still prompt the BOJ to react. BOJ rate hikes could well spill over into 2026. Accordingly, we see modest curve steepening across DM curves as the short end (<3 years) gets anchored by still dovish central banks.

EM/Asia rates: Tug-of-war between slower growth and external uncertainty

For EM / Asia rates, the much-awaited respite from lower Fed rates may not be enough to justify outright receive positions. Our relative value monitor indicates that Asia local currency govvies are still facing considerable headwinds even as Fed easing is now well underway. Between a firm USD (thus far) and higher USD rates as Fed easing bets get pared (and US equities still buoyant), the environment is still challenging. To be sure, some central banks (Indonesia, Korea, Philippines) have begun easing, providing a bit of tailwind to LCY govvies. China, meanwhile, has also embarked on more rate and RRR cuts to support the economy. However, the external environment may constraint how far Asia central banks can ease with Asia FX weakness seen since the start of the Fed cut cycle, which was also when the market started pricing in Trump’s policies and a resilient US economy.  In the end, there is a conflict of domestic and external priorities for Asia central banks. Receive positions would be more apparent for economies where:

-growth is clearly stalling and there is a need to support the economy;
-inflation is cooling, keeping real rates high;
-currency weakness is not apparent;
-less susceptibility to tariff announcements and the subsequent risk-off reaction. Arguably, this means that less export-oriented economies may see less volatile price action.

Trades for 2025 have to be a lot more opportunistic. Alternatively, spread plays may be a better way to express views without taking a level view of rates. Below, we lay out some of our high conviction ideas.


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