Citi Research outlines its strategic approach for navigating the U.S. Treasury market in 2025, emphasizing a cautious stance amid economic uncertainties. The report highlights a neutral outlook on the yield curve, with a focus on long-term Treasury yields, which are projected to range between 4.69% and 4.98% for the 10-year and 30-year bonds, respectively. Citi analysts suggest that the market's current pricing of a shallow rate cut cycle followed by a quick normalization may have gone too far, presenting opportunities in the front-end rates. "The front end looks cheap to us in absolute terms," Citi notes, recommending a long 2-year swap paired with a short 3-month 2-year receiver to capitalize on this view.
Additionally, Citi anticipates a potential tightening in 30-year swap spreads, driven by fiscal uncertainties and a possible buyers' strike in 2025. The report also identifies opportunities in TIPS IOTA spreads, expecting them to tighten due to negative net supply in the first quarter. "Demand for inflation protection from investment funds has increased," Citi observes, suggesting a strategic position in TIPS to benefit from this trend. As the market navigates these dynamics, Citi's insights provide a roadmap for investors seeking to optimize their fixed-income portfolios in a complex economic landscape.