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US Treasury yields rose to the highest level since late November last week, even though markets remain convinced that the Federal Reserve will cut interest rates further when the Federal Open Market Committee meets this week. The 10-year and 30-year yields rose 25 basis points and 28 basis points to 4.4% and 4.6%, respectively.

The rise in yields pointed to renewed investor concerns over how US President-elect Donald Trump鈥檚 potential policies could expand government borrowing while putting upward pressure on inflation. November鈥檚 producer price index (PPI) release turned out stronger than expected, while the US Treasury鈥檚 auction of USD 22bn of 30-year bonds met with soft demand.

But, we see limited room for Treasury yields to rise much further and expect them to move lower over the course of 2025, benefiting quality fixed income.

Disinflation looks likely to continue, even if the path is bumpy as it was this year. While headline PPI inflation readings overshot expectations, the core PPI and components that feed directly into the Fed鈥檚 preferred inflation gauge were softer. November鈥檚 consumer price index also showed slower increases in shelter costs on both a monthly and annual basis. We continue to believe that overall inflation should moderate further, and that potential tariffs should not lead to sustained higher inflation over the medium term. In fact, as the election in November demonstrated the high political cost of inflation, we believe universal tariffs are less likely. Blanket tariffs through executive action would face legal challenges, and they are unlikely to garner enough support from Congress.

The Fed should continue to lower interest rates in 2025, albeit at a slower pace. We expect the US central bank to cut rates by 25 basis points this week, and by a more gradual once-per-quarter pace in 2025. Guidance on future easing remains to be seen, including policymakers鈥� projection on the number of rate cuts for next year and where the terminal policy rate likely is. But with the Fed signaling its commitment to bring rates toward 鈥渘eutral鈥� against the backdrop of moderating inflation and a softening labor market, we believe further Fed easing should keep any rise in yields in check.

Concerns over US government debt should limit the scope of Trump鈥檚 fiscal plans. US fiscal policy is unsustainable over the long term, in our view. The Congressional Budget Office (CBO) has projected that the federal deficit would average USD 1.9tr per year between 2025 and 2034, or 5.4% of US GDP over the period. This compares with the average annual deficit of 3.7% over the past 50 years. The CBO has also projected that federal debt held by the public would rise to 122% of GDP at the end of 2034. We think the current US debt and interest rate dynamics leave little leeway for an even greater fiscal expansion.

So, while further volatility is likely, we expect Treasury yields to decline in a lower-rate environment. We believe quality bonds offer appealing expected returns and potential for capital gains, and see value in diversified fixed income strategies, including senior loans.