Deutsche Bank analysts have issued a warning to traders ahead of next Wednesday’s highly anticipated Fed rate decision.
Recent forecasts of interest rate cuts have significantly boosted U.S. Treasury prices, but Deutsche Bank’s private banking division is cautioning investors to prepare for increased volatility.
This warning comes as the bank suggests that U.S. policymakers may not ease monetary policy as aggressively as traders expect.
Deutsche Bank Warns of Potential Mispricing
According to Stefanie Holtze-Jen, Chief Investment Officer for Asia Pacific at Deutsche Bank in Singapore, the Federal Reserve is expected to begin its rate-cutting cycle next week. The bank forecasts a total of six rate cuts by September 2025. However, this is significantly less than the nine rate cuts expected by some investors, and if this mispricing persists, it could lead to turbulence in the markets.
The debate over how much the Fed will reduce rates has had a significant impact on the U.S. bond market. Benchmark yields have fallen for four consecutive months, marking the longest decline in three years. However, if investor expectations are too optimistic compared to the Fed’s actual policy decisions, it could set the stage for a sharp market correction.
Deutsche Bank’s Accurate Predictions and Outlook
Deutsche Bank has a strong track record in making accurate predictions in this area. Last year, the bank correctly forecasted that the Fed would delay lowering borrowing costs— a stance that was seen as contrarian at the time amid growing recession fears in the U.S. The bank also projected that the U.S. Treasury yield would reach 4.2% by the end of 2023, a level that was met last December.
In a recent interview, Holtze-Jen remarked, “The market needs to reprice, and of course, there will be volatility as a result.” She also added that the U.S. economy is standing on solid foundations, particularly from a consumer perspective, and this stability is expected to continue.
Looking forward, Deutsche Bank anticipates that the yield on 10-year Treasury notes will rise from its current level of 3.63% to 4.05% by September next year. The bank also expects the U.S. to avoid a recession, aligning with the Bloomberg survey median forecast that predicts a yield of 3.73% by the third quarter of 2025.
Deutsche Bank, Fed rate decision, U.S. Treasury yields, interest rate cuts, market volatility.
