U.S. Rates and Swap Markets: Q1 Outlook 2025

Boris Sender: Welcome to the Scotiabank Market Points Podcast. My name is Boris Sender, I’m Director of U.S. Rates Strategy here at Scotiabank, in the New York office. We are recording this episode on January 9^th, 2025, and today we will be talking about the U.S. rates outlook for 2025.

Joining me on this episode from New York is Charlie Comiskey, Managing Director of U.S. Rates Trading. Great to have you, Charlie.

Charles Comiskey: Thank you very much for having me, Boris. Looking forward to the conversation.

BS: And from our London office, we have James Williamson, who’s Director of Dollar Swaps Trading. James, thanks for being here.

James Williamson: Thanks, Boris. Looking forward to it. Thanks for having me on.

BS: So, I guess let’s kick it off with a quick recap of how we finished 2024.

Charlie, I'll start off with you. What did you make of the Fed’s decision to go 50 basis points in September and the drivers behind what led them to that decision?

CC: Yeah, I think basically Boris, you know, when it happened, there was some people that were pretty surprised by it.

But I think really what they were trying to tell us at the time was that they felt, given the progress that they had made on inflation and given the fact that the economy continued to perform, 2% to 3% GDP. The unemployment situation was still pretty strong, 4% unemployment rate. I think they basically looked at where they took inflation from down, back down, to almost 3%, and where the funds rate was sitting. And I think that they felt that in order to bring them, the growth rate and the inflation rate and the funds rate more back in line to where they felt more comfortable, they wouldn't take one big shot at the beginning to get it more in line to where they felt it should be, and that down the road, they could possibly slow it down, which really kind of is the way that it's playing out. You know, it looks like, if you go back, I guess, back six months and nine months, you know, the market was pricing in a lot more rate cuts than it is currently pricing in right now.

The Fed has achieved a lot of good progress here over the last few years, in bringing inflation down from 9% to 10% down to, arguably 3%, 2.5% to 3%. But it looks like we’ve kind of hit a plateau here a little bit, and that’s why the market is currently only pricing in a little less than two rate cuts all of next year.

But I think the first shot of 50, I think, was more a decision just to kind of bring them closer to where they felt that they were way too tight, given the underlying conditions and the 50 basis points, though somewhat surprising at the time, was pretty much, I think was the right call.

BS: Yeah, and that’s exactly my read of it too. They’re just trying to catch up to the fact that they had two weak payroll reports coming to that meeting.

Everyone was talking about the potential triggering of the Sahm rule and whether that meant an automatic rapid rise in the unemployment rate, that’s not something that ultimately came to fruition. But it was very interesting how the market reacted to 50 basis point rate cut, and that actually marked the bottom in 10-year yields locally. And we kind of saw a period from mid-September to the elections where yields went higher, and so it almost seemed like the market was kind of pricing, and I don’t want to say policy mistake, but an acknowledgement that now the Fed is kind of ahead of the curve, if you will.

James, what did you think about that period from kind of mid-September to the elections, and the rise in 10-year yields that we experienced then?

JW: As Charlie was saying, it was a little surprising. They went 50 at the start, and if you think about where rates were, I suppose the 25 basis point cut wasn’t really going to do a lot. So, I think they felt they had to go 50 basis points and obviously, probably the previous meeting in hindsight they would have gone out and then done 25 basis points and 25 basis points.

The data did start to turn just almost as soon as they’d done their 50 cut and then really kind of put everyone on a strange kilter that they’d cut 50 and they kind of pushed themselves into a corner having to then cut again in November and then ultimately December as well.

And I think the feeling of making somewhat of a policy mistake kind of went through the market, pushing up longer end yields and the short end with it and potentially bringing back a bit of term premium into the market, which has obviously happened more and more since then.

What we’ve seen in the past sort of two years is real gyrations in the market. We get one bit of data that’s strong, and the market reacts hugely, and one bit of data that was weak and the market reacts really strongly, and it just seemed to be the same thing happening again. Market overreacted and kind of almost pushed the Fed, then kind of overreacted the other way. Now, you know, where we’re pricing less than two cuts for the whole of 2025, it really feels to have gone too far now.

BS: Yeah, and part of that repricing we’ve seen in one of the key drivers, obviously, was the price action going into the elections where the market was sniffing out the increasing possibility of a red wave. Which, you know, ultimately came to fruition, and the sell off kind of extended after the elections. And when I think about that timeframe, you know, it was always our view that the market was underpricing the probability of a red sweep, and we’ve correctly observed that historically, the outcomes in the executive race and the congressional races were very correlated.

We thought that a rise in yields at that time was appropriate, and we thought that the yields would go further after the election outcome, and they certainly did and kind of topped out in the middle to back half of November. And then we experienced a bit of a relief rally, and I think there was a little bit of optimism that the Trump platform would bring about a bit more of a balanced picture as it relates to kind of inflation and deficit spending, and at the time we had a lot coming out on the potential DOGE efforts, the Department of Government Efficiency, attempts to reduce government spending and a lot of rhetoric against really tackling inflation. I think that that brought some peace and calm into the markets for at least a few weeks, and then that was kind of interrupted by a fairly surprising December FOMC meeting. They did cut 25 basis points, but the message of the press conference was quite a bit different than we heard before.

Charlie, what did you make of that press conference?

CC: I think what we’re starting to see from the Fed and, you know, we’ve talked a lot about that here on the trading desk, about the decade after the financial crisis being a decade of very, very low interest rates, you know, sub 2% most of the time. It was a period of low inflation, low growth, and low interest rates, and that kind of mindset, I think, worked its way into the minds of the people who trade these products. We fast forward to the pandemic and obviously what that bought us in terms of zero interest rates, negative interest rates in Europe. The mindset that we’re in a low-interest rate environment for the rest of our lives.

And then suddenly, the highest inflation in 40 years shows up. A lot of people get caught off guard on the amount of rate hikes and the amount of work that the Fed had to do to try to slow inflation. And once that reversed, as we all know, a year ago, we’re pricing in a whole, taking the funds rate right back down to 2.5%.

And I think what's setting in here is the reality is that this is a new, this is normal times where, you know, inflation is anywhere from 2% to 3% to 4%. Interest rates, the funds rate hovers around the 3% to 4% level, not the 0% to 2%.

But this is really, this is the real reset to normal, and I think that meeting, with the Fed, they were telling us that. That they’re going to slow down with the rate cuts because they’re going to have to because of where inflation sits and that it's going to be much more data dependent going forward. That yes, they believe there’ll be rate cuts going forward, but they're not as much written in stone that they were six months ago. They’re realizing that inflation, getting inflation to 2%, which is something else we talked a lot about Boris. How difficult. It was easy getting it from 9% to 4% or 9% to 3.5%, getting it from 3% to 2% is going to be very, very difficult. And I think that that is an acknowledgement of that, and that is why the markets are now struggling with rate cuts going forward because they’re recognizing how difficult the fight to get to 2% is going to be.

BS: Yeah, and that was certainly part of the gradualism message, right? Part of it was the FOMC observing that inflation was reaccelerating in Q4. And, you know, that was frankly well telegraphed by the CPI fixings market ahead of time, they’re going to see this sort of natural acceleration, you know, given the base effects and everything else.

So, that certainly has challenged the Fed’s conviction around getting to 2% in short order. But they also introduced a new element of uncertainty and that was driven by the outcome of the elections and sort of they alluded to many participants in the FOMC believing that this election kind of increased the level of uncertainty as it relates to their inflation and growth outlooks, which made people a bit more cautious than they otherwise would. Which is interesting, of course, because only at the meeting right before then, they kind of suggested that they’re not going to allow any speculation of Trump policies to really impact their judgments until those policies are enacted and they’re impacting economic variables, and it was quite a sharp about-turn in kind of the Fed’s perspective on it.

So, James, you know, what did you make of that shift from the November to December meeting as it relates to kind of how politics would be impacting the Fed calculus?

JW: Yeah, I mean, I guess the November meeting was just two days after the election, so it gave them little time to react directly to it. Obviously, they would have had some views going into it before.

I think, look, it’s hard for a political point of view for the Fed to say too much and to get too involved and to make too many opinions, but they have to have some idea about what tariffs, and what immigration plans, and what all these things will do to inflation going forward and the economy generally.

I think the Fed are going to struggle, like probably the rest of the market, interpreting the signals that we’re going to get out of the administration. And also, we don’t know how easy it will be for him to pass what he wants through both the House and the Senate.

Which already he seems to be having a little trouble in both of those aspects. So, I think the Fed have got to play a really, really tricky line to play there. They’ve got to, one, they’ve got to acknowledge it like they have done to some extent, but when we saw the minutes come out, they were very, there was very little detail on what they talked about, right?

And they’ve got to tread that fine line of acknowledging it but not overreacting to it and not reading too much into it because things could change very quickly. He can, he can say one thing and do something completely different.

CC: Irregardless of who the administration is, they write policy, they bring that policy to Congress, they vote on it, whether it be tax cuts, or spending cuts, and whatever it may be. And the Fed has to react to what they see coming. And they have to talk about the idea that they’re talking about tariffs, which theoretically would, you would think is inflationary.

And they can say they’re not political, that they’re not going to vote for one candidate or the other, or they’re not going to root for one candidate or the other, but they certainly have to look who the candidates are and who the winners are and determine what those winners are going to do once they’re in office, because they have to react to policy.

BS: Yeah. I mean, certainly, the change in administration and change in policy can in fact impact the inflation trajectory, but I do find that interesting that, the pros that trade the inflation swap market, if you look at what the inflation swap market did in various tenors between the elections and the FOMC meeting, 1-year inflation swaps went up about three-tenths of 1%. The 1y1y went up about 0.1%, but the 2y1y, the 3y1y, the 5y5y, they’re all unchanged to a touch lower from where they were before the elections. So, that was a very interesting statement. It kind of suggested that perhaps at least the tariffs may have a one-off impact, but ultimately doesn’t really change the trajectory of inflation, which is kind of the defense prior messaging on tariffs in terms of how they impact inflation and it’s sort of this one-off fleeting impact the same way a VAT hike or a tax hike would have.

But you know, certainly tariffs are not the only aspect of the platform that the Fed may find inflationary. I think the other wording in the minutes alluded to a change in migration policy, and you know, I think that is the more legitimate risk in terms of the Trump platform on inflation, which is what’s going to be the effect of potentially less migration.

But I think one of the ways in which perhaps my 2025 forecast deviates from consensus is that I believe that folks are under appreciating the other components of the agenda, which may prove to be disinflationary. So, when I think about the various things that have been stated, things like, increasing incentives to increase domestic crude production or reducing government spending to some degree, the broader deregulation agenda, at least attempts to resolve international conflicts. I think all of those will prove to be potentially offsetting to any type of inflation coming from the labor market. And I think that actually if sequenced properly, the platform could prove to be on net disinflationary, and I think that’s probably the place we, where we deviate the most from consensus.

James, what do you make of kind of how the market’s been trading the new administration, given the fact that we’re, you know, a week and a half or so away from inauguration.

JW: Yeah, so, I mean, the initial reaction was what we expected, right. Rates went higher, swap spreads went lower, curve steepened. But it was pretty short lived. And then we, we kind of reversed all that very quickly. And then obviously, two weeks since Christmas, we’ve seen a fairly decent steepening and yields at the highs.

I think, a combination of factors going into all that, but I think the market’s starting to treat the incoming administration as slightly more of a risk to long term rates than they were previously. We’re getting closer, but the market should have been forward looking in November and December. I appreciate what you say about DOGE and things like that, but my worry for his policy is that he's going to struggle to get it, get everything he wants through both the House and Senate. I think also a lot of the deregulation, a lot of the regulation burden that exists is not necessarily at the federal level as well as lots at the state level, and that’s going to be very difficult for him to get through to make any real dent into that. I also think that possibly the market's wondering how he will react and how it will work with Musk and Vivek and people and how long that will last. He's obviously had a history of falling out with people in the past. So, obviously the market, you know, in recent times with yields getting up closer to 5% in the long end again, so obviously starting to put a bit into the market about the worries of what’s going to happen and whether tariffs are really going to be as inflationary and as damaging as they could be.

He’s made a lot of comments this past week particularly to the North and Southern borders with Canada and Mexico and even to some European countries that have obviously had had an impact on rates and on the dollar. The market is probably anticipating that we’re going to see a lot of headlines from Trump this year, as we did in the first term and as we always do. That means things are going to move quickly and, there needs to be more premium put into rates to compensate for that kind of volatility that he will generate.

BS: And that’s exactly what we've seen, the backup and yields that the hawkish, December FOMC meeting brought forward has kind of driven some real money to the sidelines, and we've been seeing this in fund flow data with a dramatic slowdown in the amount of money that's come into our asset class. And as a result, we’ve observed that a lot of this backup that we’re seeing in the long end, it’s actually partly driven by short rate expectations, but materially driven by term premium, which kind of goes to your point, James, about kind of the risk premium brought back into the market, given that we just traded off election uncertainty for now, policy uncertainty potentially going forward, especially given all the potentially contradicting views around the degree to which we'll have tariffs, what'll be exclusions, inclusions, et cetera. I think that brings about some uncertainty and some of the amount of the increase in term premium is likely justified.

But if I look at the levels and this is, I’m referencing the ACM model the New York Fed publishes, if you look at that time series of term premium, we’ve eclipsed the fall 2023 levels. And going back to 2023 was a time, is kind of the last time, we had a term premium-driven bear steepening move in the treasury curve, and it was based upon a lot of supply demand anxiety. And we’re there and we eclipsed those levels. In fact, we're at the highest levels since the spring of 2015 when you had a Bund market-driven repricing of the long end globally. And so, the question is, has it overshot a bit too much, too fast given what we know?

Looking back to the last time term premium was at these levels in the fall of '23, what became abundantly clear when 10s touched 5% and 30s eclipsed 5%, was the onset of a fiscal and a monetary put. And I think that that’s kind of part of the view as to what can potentially arrest the sell-off the next couple of weeks.

Charlie, do you think that this repricing of term premium, the fact that we’re back to close to 5% in the long end, do you think that’s going to make the Fed inclined to kind of dial back some of their hawkishness?

CC: I think it's going to set off alarms to be honest with you, Boris. Again, something that we talk about a lot too is the one thing that nobody can have, to be honest with you, given the fiscal situation, is much higher interest rates. So, 5% is a number that scares the daylights out of the Fed, scares the daylights out of the Treasury, and should scare the daylights of the incoming administration. And I think that as we’re pushing up at 5% here again, you know, in a very long end and, and the 20-year is above 5%, I think there again, there will be pushback in Washington on how do we address that.

A lot is going to happen here in the next sixty, ninety days, in terms of what’s going to be looked at in Congress, and how this all plays out. I think there’s a lot of uncertainty and nervousness about how it’s going to play out, and I think that nervousness is being reflected in yields. And, as it plays out, which I believe that it will, and that is where they start to shrink the government, the job market softens more than it has so far, growth softens, I think that rates will begin to fall again. And I think obviously it will be led by the front end.

And again, this is this is my own opinion, this is how I think it’s going to play out. But I think the bump up at 5% here again, is just reflecting the market’s nervousness on the uncertainty of the next 60 to 90 days, and I think ultimately, it’ll be a buying opportunity.

BS: James, just to bring you into this conversation, do you agree with the view that the monetary and fiscal put will kick in this time around at these levels, and do you think it’ll be effective this time around like it was in the fall of '23?

JW: I mean, it’s obviously going to depend a lot on the data that we get out. I mean, we’ve got payrolls tomorrow, which it’s probably, will have been out by the time this is released, but payrolls and data like that are going to be key in the short run. And if we still see the economy going really strong, then the short end is going to really struggle to rally back. And I don’t think the Fed will be able to really do much or convince the market if long term yields do go, and also if they do end up cutting rates more aggressively there’s a danger that that will lead to really high long end yields with people thinking that they just kind of lost control, and they’re going to just get inflation going, really, really going again.

So, I think they’ve got a really fine line to tread. If rates stay up here and the long end pushes through 5% and goes towards 5.5%, even 6%, then what's going to happen to the stock market? And then, you know, you get feedback loops there. That’s going to be what we’re going to have to watch.

But I think it's going to be difficult for the Fed themselves to really get a handle on the long end rates, just from the difficulty that it will have in terms of where inflation is, where the labor market is, they’re in a bit of a quandary and a difficult situation.

One thing with long end rates here is, we’ve experienced over the past 15 years that rates have been so low that obviously anything over 5% becomes really attractive. People don’t remember what rates used to be like, and a lot of…

CC: I do.

JW: But people look at 5% and think, wow, that’s fantastic, right. But whether that’ll be enough, it’s difficult with the deficit where it is and all the fiscal problems that exist not just in the U.S., but around the world.

BS: Yeah, and it's certainly been a global sell-off, it’s not something just gripped the U.S. The UK, obviously, has been headline grabbing, their long end has reached the highest level since 1998.

So certainly, this has been a global phenomenon, and it’s been, it feels like it’s been feeding upon itself. But, you know, if I look at the, what 5% borrowing costs in the long end for the government actually translates to, if you think about your typical, very creditworthy, investment grade borrower probably borrows 100 above that, you know that those are borrowing costs in the order of 6% to 6.5% into an economy that's expected to grow nominally at 4.5% next year, or this year rather, and probably a similar level in 2026. These are not particularly attractive borrowing costs for any type of expansion. And I think certainly the incoming administration knows that these levels are probably too high for what they want to see, which is kind of an investment led boom in the U.S., where we re-onshore some of our consumption, that is very difficult with borrowing costs that high.

I think the Fed is also cognizant that financial conditions have tightened quite a bit in that aspect since the December meeting, so I wouldn’t be surprised if rhetorically, they kind of ease off a little bit of their messaging that they had in December, and we saw inklings of that this week with Waller’s comments around his support of continuing the rate cut cycle, et cetera.

So, I do think things will happen in the margin. And when I think about the events for the coming month, the inauguration is not the only important event that traders should have circled on their calendars.

You also have the Fed meeting on Wednesday, January 29^th, followed shortly thereafter by the first quarterly refunding announcement on Wednesday, February 5^th, and even though it’s only going to be a few weeks into the administration, they’re likely to continue the guidance of the prior administration in terms of focusing issuance on the short end of the curve. Which I think that the continuation of that forward guidance, I think will appease some of the anxiety around supply for this year. I think there is a perception that the new administration, which has been critical of the prior administration’s use of Treasury bill funding, I think all incentives point towards continuing with that strategy and, you know, one of the things that's pretty glaring is now that the curve is reinverted, the short end offer is lower all in yields than the backend and, James, you probably know better than anyone, the short end trades at SOFR flat and the backend trades at SOFR plus 85. And so, you know, if I was an issuer, I know which part of the curve I’d go to for sure.

But there are some voices out there who talk about, you know, the possibility of significantly higher yields in the near term, some buy-side participants have flagged breaches of 5% towards 550, some even call for 6%.

Charlie, what do you think is required for us to get to those levels that some folks are calling for?

CC: You’d have to see inflation start ticking up. You’re talking about getting to 5.5%, 6% long yields, you mean?

BS: Yeah.

CC: Yeah, you’d have to see upticked inflation moved back towards, you know, 4% you’d have to continue to see, you know, a sub 4.5% unemployment rate. You know, those are scary numbers to me, Boris, to be honest with you.

I just don’t think they’re tenable given the fiscal situation. And I think there would be a political pushback on that. I really do. I just, you know, again, as James mentioned before, the equity market, which has rallied for two straight years of 25%. I mean, I think the equity market would be at serious risk.

So, what conditions can cause that to happen? Would be again, a lack of confidence in what the administration, the new administration is doing. Are they spending money wildly again? Are they cutting taxes too broadly? Are they not? I just don't see those things happening. Given the fact that the people that they've nominated, including Bessent who’s been A deficit hawk his entire career.

These are things that they have talked about. I have a hard time believing we can get there. Again, a spike in inflation would probably most definitely take us there. I just don’t see that happening. I really don’t. But I think those conditions, if they were to occur, would be bad for everyone.

BS: Yeah, that’s exactly right. And I tend to think that if we do get a pretty meaningful breach of 5% long end, especially if it’s driven by real yields, it's going to be a massive negative for equities. And we’ve seen recently with yields approaching these levels, the equity market has started to have its wobbles.

I do think that’s something that the Fed has historically responded to and is likely to respond to if it happens this time around. Part of the catalyst could be inflation. But I think that, you know, we talked about the kind of two-sided risks to supply if DOGE is successful, then we might end up having, you know, better supply dynamics for this year than people think.

If it’s not successful, probably just have worse dynamics given just the natural refinancing needs the government has and coupons naturally going up. But if I think about the demand-side, like what are the various levers that can potentially be pushed to incentivize demand?

There are a couple of things that have been floated by incoming Treasury Secretary Besson around improving demand dynamics. Some of the things that have been mentioned include, and this has gained esteem in terms of conversation, is the exclusion of treasuries from the SLR calculation.

That’s something that’s been floated as a possibility in order to not just improve demand for the treasury market, but as a way to unlock capital for more productive purposes. It also provides a mechanism for the repo market to continue functioning, even with continued balance sheet runoff.

So, there’s a couple of pluses to that rule. And that, and that’s something actually that does not require congressional approval or legislation. This could be done from my understanding between the Fed, the OCC and the FDIC. That could be an interesting angle and that could potentially unlock some amount of bank treasury demand.

James, the treasury exclusion from SLR calculations, obviously something that’s very meaningful to your world, trading swaps and swap spreads, do you think that any of that's currently in the price?

JW: I think to some extent, it is. What we’ve seen in swap spreads over the sort of past year or so is that whenever there’s some kind of technical change like this, it's almost buy the rumour, sell the fact, in terms of it’s on the market. When we've seen QT, and when we've seen the recent tweak to the RRP rate, you know, spot spreads would go bid. And then when it actually happened, they would go back offered. And the effect has actually been pretty small. I’m not sure SLR will have a, exclusion, would have a huge impact on swap spreads, particularly. We’ve seen over the just this week, obviously, there’s been huge demand in terms of buying of asset swaps going through the market.

Some of that is obviously, as well, based on the change in the Fed, where Barr has stepped down, which again, is not per se a technical thing happening to the market, but it is obviously a signal that the perhaps capital rules will be weakened somewhat with Barr dropping out and then someone else coming in. And all these things have sort of a short-term effect of a couple of basis points, but they don’t tend to, at least over the past year, they don’t tend to have had this big, long-lasting effect. And what’s really driven the swap market is just the amount of supply that’s gone on and the deficit situation, which has really pushed swap spreads down so much over the past year, year and a half, particularly in the long end.

So yes, I do think if, if that actually happens, spreads in the build up to it will go bid, but I think they’d probably quickly reverse most of, if not all of that price action.

BS: So, in the event that this comes to pass, how much do you think this is worth in swap spreads, whether that’s fives, tens or thirties?

JW: Well, I mean, that's a, it's a difficult question to answer. But you know what we've seen usually on these kind of impacts to buying more wherever the purchasing of more treasuries comes from is normally a sub five basis point move more like two or three, and I think we'll see something similar.

Do you have a different quantum on that?

BS: Yeah, it felt like when there was that temporary exclusion from March 2020 to March 2021, it seemed like the swap spread tightening that happened after the exclusion came and went was, you know, a little bit larger than that, but you know, obviously a lot more things are going on. There was a, there was an explosion of deficit spending around the spring of '21, so, it’s really hard to handicap as you’re suggesting. I tend to think that it probably is going to be worth as much as 10 basis points, but only in the long end. I think the flatness of the spread curve, I think the spread curve will probably re-steepen somewhat with long spreads, probably outperforming some, given the fact that if you take away the capital consumption from being long swap spreads, then all of a sudden, longs and so forth plus 85 on a return on capital, from a return on capital perspective, looks that much more attractive. So, I tend to think it's probably closer to 10 than 5, but I think there’s all other elements here.

Obviously, you know, deficit spend, the expectations thereof, flows, et cetera. So, once again, one of those things, it’s really hard to handicap. But I think as, as you're suggesting, I think there will be these episodic widenings of swap spreads if this conversation gains steam.

So, I think we covered a lot of ground, and I think it’s time to put some of our forecasts to task.

So, I’m going to ask each of you to give me your expectation for the Fed in terms of how many cuts will be delivered this year?

CC: Okay, I’ll start. I think, you know, given what I think is going to happen with this new administration, where the economy slows, inflation remains in the 2% to 3% range, I think the Fed probably delivers three or four cuts this year.

That’s my opinion. Again, that’s my opinion on January 9^th. But given what I know right now and what I believe this administration is going to do, and my belief also that everybody is all in on keeping rates stable and lower, from here, I think it’s actually going to happen, and I think the Fed will deliver 3 to 4 cuts this year.

BS: What do you think, James?

JW: Yeah, I’m pretty similar. I think probably three to four makes sense. Pretty much all the members of the Fed, whatever they say about slowing down rate cuts, they pretty much all talk about they’re going to do rate cuts, however gradual it is, and I think that means one a quarter or close to one a quarter.

BS: I’m surprised we're all in agreement on three, three to four rate cuts.

CC: [laugh] We are? I’m changing my opinion. Hang on a second.

BS: Yeah, I, you know, I tend to agree with you guys. You know, whether that’s a weak payroll report or even moderate success on the DOGE front, I think there’s numerous paths to the Fed kind of cutting three to four times. I have a hard time seeing more than four. I have a hard time seeing them go to kind of 3% or lower given the fact that the neutral rate, and they’ve admitted that the neutral rate has gone higher from pre-pandemic levels. I tend to think we'll probably settle in, in the kind of three, the mid threes area. So, whether that's 3% or 3 5/8% or 3 3/8% on the funds rate.

Now, probably this is going to bring in a bit more divergence, hopefully. I’m going to ask you about your calls on 10-year yields. So, 10-year yields today are trading at 469. I’m going to ask you two for the low print of the year on the yields, the high print of the year, and where do you think we’ll close out 2025 in 10-year yields?

Charlie, I’ll start with you.

CC: Okay. Okay. 10-year yields, I think, are going to test us again at 490 to 5%, possibly in the next month or so. And I think the, the low end of 10-year yields are probably just below 4%, maybe 3%, 3 7/8% to 4%, given the way I see things playing out.

I don’t think the bear market in the bond market is over just yet.

JW: And I, I think we'll have a bit of a wider range. I think this year, especially with Trump is going to be a hugely volatile thing. I think tens could easily get to 5.5%. I think 30s can get to 6%. But I think we’ll probably could easily touch below 4% as well, and I think things are going to get pretty wild this year.

BS: Okay.

CC: I hope he’s right, by the way. That's good.

BS: That’ll be a lot of fireworks. So, okay. So, James gave a 200 basis point range, right? If I’m reading it correctly, 4% to 6% on 10s.

JW: 4% to 5.5%.

BS: 4% to 5.5%, so 150bps. Charlie was what?

CC: Yeah. A hundred basis points.

BS: A hundred basis points.

I probably suggest something along the lines of 390 basis points to 5%. I think that that's probably a meaningful range.

And you know, I do think that ultimately at the end of the year, 10s will finish closer to that low end of the range. So closer to, I think, 425 basis points, given my view of four rate cuts.

I think that will reset terminal rate expectations. And I think to some extent, even those long-dated forwards will come down, and if the Fed is able to ease four times this year.

But we'll have to have both of you back on to kind of revisit some of these calls.

CC: Only if I’m right, Boris.

BS: That's exactly right. We have good optionality. We have you on both, right? So, one of us is about to be right.

CC: Exactly.

BS: Well, it was awesome to have you guys. Thank you for joining, and I think we should do this on a quarterly basis. What do you think?

CC: I like it. I like it. And thank you for having me. This is a good conversation. Very good.

JW: Yeah. Thank you, Boris.

BS: Thanks James. Thanks Charlie. 

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