Citi Withdraws Long-Term US Bond Recommendation

Citi Strategists Retract Recommendation on Long-Term U.S. Bonds

Citigroup Inc. strategists withdrew their earlier recommendation that long-term U.S. bonds would underperform amid mounting pressure on the Federal Reserve. Last week's policy decisions by a minority vote indicated that concerns about the central bank's independence had "marginally" eased.

New Assessment of Bond Yields

Citigroup strategists including Dirk Willer and Adam Pickett recommended "profit-taking" on a position that the yield on futures 30-year U.S. bonds will outpace that on 5-year bonds. The strategists increased their position from 40 basis points in May to 72 basis points in August. They subsequently outperformed the spread by 60%.

Political Developments and Their Impact on the Bond Market

The initial recommendations were based on the expectation that the tax and spending bill signed by Donald Trump would increase government debt levels. In late August, Trump's attempt to oust Fed Governor Lisa Cook raised concerns that the central bank would undermine its credibility in fighting inflation, prompting strategists to add to the position.

Certainty over the Fed's Rate Policy

Citigroup strategists noted that "supply concerns have diminished significantly since May." This month's Fed policy meeting has largely eased concerns about independence. However, bond investors are scaling back their expectations for the Fed's interest rate path in the coming months amid mixed signals from officials.

2025 Expectations and Market Scenarios

Secured Overnight Financing Rate (SOFR) options, which are highly sensitive to the Fed's policy expectations, show that market participants are positioned for only a 25 basis point rate cut in 2025 and a neutral interest rate scenario that is higher than current market expectations.