The U.S. government bond market is the most liquid government debt security market in the world. The treasury market finances the U.S. government, implements monetary policy, and is a safe investment haven during tumultuous times.
President George Washington, the founding father and first U.S. leader, appointed Alexander Hamilton the first Secretary of the Treasury. Hamilton established the U.S. Treasury Bond market in the early 1790s.
The U.S. Federal Funds Rate is the interest rate banks and credit unions charge each other to borrow reserve balances overnight. The Federal Open Market Committee of the Federal Reserve sets a target range for the Fed Funds Rate. While the Fed sets the short-term rate benchmark, rates further on the yield curve are a function of market forces. Therefore, the market for U.S. government securities is a real-time barometer of the full faith and credit the market ascribes to the U.S. government.
The bond market and interest rates are ground zero for the path of least resistance of markets across all asset classes. Higher rates tend to weigh on stocks, while lower interest rates support higher equity prices. Rising U.S. interest rates can support the U.S. dollar against other world currencies and vice versa. High rates tend to weigh on commodity prices as they increase the cost of financing inventories. Meanwhile, rising rates tend to cause problems in the housing market as mortgage rates follow U.S. government debt securities. In early 2025, short-term rates have been falling, but long-term rates show no signs of following as the bond futures remain under pressure.
The trend in bonds remains lower
The U.S. 30-year Treasury Bond futures reached a record spike high in 2020. The trend has been bearish since the 2020 highs.
The monthly chart highlights the bearish trend of lower highs and lower lows, leading to the October 2023 107-04 bottom. In 2024, the long bond futures traded in a 112-27 to 127-10 range. In early 2025, the bonds traded to a lower 110-19 low and were at the 114-18 level in late January. While bonds have not declined below the October 2023 107-04 technical support level, they remain under pressure in early 2024.
The Fed accommodation falls on deaf ears
In March 2024, the Federal Reserve began cutting the short-term Fed Funds Rate. A series of rate cuts took the Fed Funds Rate 100 basis points lower in 2024. At the most recent FOMC meeting, the Fed adjusted its forecast for another 100-point reduction in 2025 to 50 basis points as inflationary pressures remain stubbornly above the central bank's 2% target. However, the latest December consumer price index showed that core inflation at 3.2% was slightly lower than the previous month, increasing the odds of one more 2025 rate cut for a total of 75 basis points.
Meanwhile, the bond market has mostly ignored the short-term rate cuts as the long bond's trend remains bearish and long-term interest rates remain stubbornly high.
The case for lower bonds and higher rates
The case for lower bonds and higher rates in 2025 includes:
- Inflation remains above the central bank's 2% target level.
- The U.S. debt at $36.415 trillion erodes the full faith and confidence in U.S. government debt securities.
- Uncertainty over the second Trump administration's policies and the potential for import tariffs has been bearish for bonds.
- The trend in any market is always a trader or investor's best friend, and the path of least resistance in the long bond futures remains bearish in early 2025.
Markets have settled into the reality that long-term interest rates remain higher for longer. Meanwhile, the markets became accustomed to very low interest rates before and during the global pandemic. As someone involved in markets since 1980, I know current rates are not that high. My first home mortgage was at 13.5%, so current rate levels are closer to the average over the past four and one-half decades.
The case for higher bonds and lower rates
The case for a rebound in the bond market includes:
- At 4.375% on the Fed Funds Rate, financing the U.S. debt costs over $1.59 trillion annually. If spending and revenues are equal, the debt will increase each year, putting pressure on the Fed to continue cutting short-term rates, which could eventually filter through to the bond market.
- The Trump administration has pledged to increase U.S. traditional energy production. While energy is not a core factor in the leading inflation indicators, oil and gas prices are significant inputs for all goods and services. If increased U.S. output leads to lower oil and gas prices, inflation could decline to the 2% target, encouraging more Fed Funds Rate reductions over the coming months and years.
- Higher rates further on the yield curve encourage investments in fixed-income assets. As capital flows into the bond market, it supports higher bond prices.
- The President and his administration favor lower interest rates to encourage economic growth. Appointments to Treasury and the Fed will likely support policies that lower interest rates.
Meanwhile, the weekly chart shows that the bond market is digesting the decline in bonds.
The weekly chart shows that while the long bond futures are trending toward the October 2023 low, they have not challenged the technical support. Meanwhile, the rising open interest is a sign that higher rates are attracting investment capital to government debt securities, which could be bullish for bond prices and support lower future long-term interest rates.
Expect lots of action in bond futures and the TLT ETF
In early 2025, the impact of the global pandemic will continue to fade, and the new U.S. administration will impose a significant shift in foreign and domestic policy initiatives. While the geopolitical landscape remains a minefield of potential issues, the ceasefire and hostage release between Israel and Hamas and the potential of a compromise that ends the Ukraine war could calm tensions.
Markets reflect the economic and geopolitical landscapes. The new administration successes could cause a rebound in the U.S. bond market, as they would increase the faith and credit in the government and its debt securities. Moreover, with the leading stock market indices near record highs, capital flowing to the bond market at the current elevated level could be the most bullish factor for bonds.
The iShares 20+ Year Treasury Bond ETF product (TLT) moves higher and lower with the long bond futures.
The monthly TLT chart shows that technical support and resistance levels are at $82.42 and $101.64 per share, respectively. At around $88.40 per share in late January, the odds could favor a rebound in the TLT ETF.
Interest rates impact markets across all asset classes. Housing demand depends on mortgage rates, currency levels depend on interest rate differentials, commodity prices are interest-rate sensitive, stocks tend to move inversely with rates, and most assets reflect changes in the bond market. In early 2025, the bond market could be overdue for a rebound. Moreover, U.S. government debt securities remain a haven for investors worldwide during tumultuous times. Therefore, the October 2023 lows could be a significant bottom for the long bonds and the TLT ETF.