Citi Research outlines its top five rate trades for 2025, emphasizing a strategic approach amid market uncertainty. 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 what they see as an overreaction in market expectations for Federal Reserve easing. "The front end looks cheap to us in absolute terms," Citi notes, highlighting the potential for fiscal policy delays and labor market vulnerabilities to influence rate dynamics.
Citi's forecast for U.S. Treasury yields 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, reflecting skepticism about the sustainability of recent yield increases. Additionally, Citi anticipates tighter 30-year swap spreads and a steeper 2s10s inflation swap curve, hedged with a short WTI put to mitigate energy price risks. These strategies underscore Citi's view that while the market has priced out rate cuts aggressively, the path forward remains fraught with potential shifts in fiscal and monetary policy.