Citi Research outlines its top five rate trades for 2025, emphasizing a strategic approach amid market uncertainties. The report suggests a cautious stance on the U.S. Treasury market, with a focus on tactical positioning to navigate potential volatility. Citi analysts recommend a long position in 2-year swaps paired with a short 3-month 2-year receiver, capitalizing on the market's overestimation of Fed rate cuts. "The front end looks cheap to us in absolute terms," Citi notes, highlighting the potential for a shallow cut cycle followed by normalization to higher rates.
Citi's forecast for U.S. Treasury yields in 2025 includes a base case of 4.69% for the 10-year, with a bearish scenario reaching 4.85%. The report also advises a 3-month 10-year payer spread to hedge against a modest sell-off, as the recent rate increase is deemed unsustainable. Additionally, Citi suggests shorting 30-year swap spreads and entering TIPS IOTA tighteners, anticipating a tightening of spreads due to reduced net supply. The strategic trades aim to leverage market dynamics, with Citi emphasizing the importance of adapting to evolving fiscal and economic conditions.