To The Moon

Below is an analysis and perspective on U.S. Treasury bonds from Tiger Brokers' analysts.

Short- and long-term U.S. Treasuries should be analyzed separately.

Currently, the 1-year Treasury yield stands at 4.2%, offering a risk-free return. $US12M(US12M.BOND)$

For the short end, as shown in the chart below, the current expectation in the interest rate futures market is that the Federal Reserve will cut rates only 1.5 times throughout the year. Tiger analysts believe this expectation is overly hawkish, making a case for going long on short-term Treasuries.

The base case Tiger analyst assumes three rate cuts.

Since the likelihood of further rate hikes is minimal, the worst-case scenario would be no rate cuts. However, if the economy and inflation are weaker than expected, or if the probability of a recession rises, the market would quickly adjust its expectations, leading to a sharp drop in interest rates.

As shown in the chart below, the blue line represents the spread between the 10-year and 3-month Treasuries (term premium), the red line shows the Fed Funds Rate, and the purple line indicates the 10-year yield.

It’s evident that the term premium tends to rise during rate-cut cycles, so any decline in the 10-year yield is unlikely to be driven by a narrowing term premium but rather by significant Fed rate cuts. This implies that if GDP growth and inflation don’t decline, the downside for the 10-year yield is limited.

The conclusion

In the first half of 2025, the risk-reward profile for allocating 10-year Treasuries may be relatively low. However, as economic growth slows in the second half, 10-year Treasuries could serve as a hedge against recession. If the 10-year yield exceeds 5%, it might be worth considering an early entry point.