While the US job market remains resilient, Lombard Odier expects rising unemployment by end-2025, a consequence of hiring freezes and slowing consumption. Against this backdrop, the Fed is forecast to lower interest rates three times this year, shifting from a restrictive to a neutral policy stance. This shift should gradually push 10-year Treasury yields lower over the next 12 months, reversing the recent rebound above 4.3%.
The USD is likely to remain under pressure despite the potential for short-term rallies, as markets digest the fiscal implications of the Trump administration’s latest budget and prepare for expected interest rate cuts by the Federal Reserve. According to Lombard Odier’s latest CIO Office Viewpoint, the budget deal expands the US deficit by US$4 trillion over a decade, with minimal benefit to growth, exacerbating long-term fiscal risks and weighing on the greenback.
"A worsening of an economy's fiscal outlook, generally accompanied by an increase in government borrowing or spending, pften results in investors requiring a higher premium to hold longer-term debt," says Dr Luca Bindelli, head of investment strategy at Lombard Odier. "Indeed, we can think of interest rates as reflecting the expectation of evolving short-term rates, plus a premium that compensates investors for holding longer maturities."
