On December 30, according to the Financial Associated Press (Editor: Xiaoxiang), investors in US Treasuries, accustomed to the long bull market in the bond market over the past decade, may still find it inconceivable: the gloomy years of the US Treasury market have now definitely persisted into the fourth year...

For the past few years, Wall Street investors have been filled with optimistic expectations for US Treasuries and other types of high-quality Bonds each year, but they returned disappointed every time. As bond market traders face another setback this year, they are becoming more cautious. In recent weeks, fund managers have been selling US Treasury Bonds, and savers have pulled out of long-term bond Funds.

All these sell-offs have pushed long-term US Treasury yields back to the top of the trading Range seen in the past two years. Meanwhile, many investors are still worried that if President Trump, if elected, implements extreme policies that could trigger inflation, such as significantly raising tariffs when he takes office next year, the situation for the bond market may become more difficult. Many are arguing whether hiding in short-term Treasury bills to collect interest might once again be a wiser choice.

Ed Al-Hussainy, a global interest rate strategist at Columbia Threadneedle Investments, stated, "Cash yields have exceeded 4%. This is quite a challenging target to surpass."

This skepticism represents a significant shift on Wall Street.

Just a few years ago, the US Treasury market was enjoying a bull market that lasted for decades, and investors rarely worried about rising interest rates—they generally believed that interest rates could not rise far above zero, or it would trigger an economic recession.

When the Federal Reserve raised interest rates significantly in 2022, most investors still believed this was merely a transitional phase. By 2023, they have been betting that the pace of rate cuts would be quicker and larger than the Federal Reserve's own predictions.

However, more and more investors are starting to believe that the USA economy can withstand higher interest rates, and inflation will continue to be a severe threat.

Starting in November, investors rushed to bet before the Federal Reserve, predicting that the Fed will only cut rates twice next year, rather than four times as suggested by Fed officials in September. When most Fed officials also predicted two rate cuts in the dot plot on December 18, traders immediately increased their bets, further believing that the Fed would only cut rates once next year or not at all.

Note: Comparing the market expectations for interest rate changes in 2025 with the Fed's forecast, the gray line represents the Fed's expectation.

These bets have had a huge impact on the returns of the Bonds market.

As of December 26, the ICE Bank of America USA Treasury Bond Index recorded its fourth consecutive year of ROI below that of short-term Treasury bills, with a return of only 0.4%, while short-term Treasury bills had a return as high as 5.2%. The highly watched Bloomberg USA Aggregate Bond Index, which includes investment-grade corporate bonds, mortgage-backed securities, and USA Treasuries, had an ROI of only 1.1% this year. This index barely surpassed Treasury bills in 2023, and underperformed in the previous two years.

Confidence in the Bonds market has become increasingly low.

Brian Nick, Head of Portfolio Strategy at NewEdge Wealth, stated that in the past, the Bonds market typically experienced a good year following a bad year. However, this has not happened recently, leading to 'people being unwilling to invest in this asset class anymore.'

FactSet data shows that this month, investors have withdrawn $5.3 billion from Blackrock's iShares 20+ Year Treasury Bond ETF. If this figure persists until the end of December, it will be the largest monthly outflow in the fund's 22-year history.

According to Tradeweb data, as of last Friday, the sharp decline in US Treasury prices has pushed the benchmark 10-year US Treasury yield up to 4.619%. This figure is significantly higher than the 4.192% at the end of November and 3.860% at the end of 2023.

Of course, not everyone is so pessimistic. Economists at Goldman Sachs predict that inflation will return to a downward track next year, allowing the Federal Reserve to cut interest rates three times. The bank's interest rate strategists forecast that the performance of 10-year Treasury bonds will surpass that of short-term Treasury bills, believing that the market has already priced in the strong economic growth and high federal budget deficit in the USA.

In fact, since US Treasury yields serve as an "anchor" for pricing a range of borrowing costs, the rise in yields themselves can have adverse effects on the economy. Recently, the sharp increase in long-term US Treasury yields has pushed the average interest rate for 30-year mortgages back up to around 7%, deepening the significant downturn in the housing market.

Pressure on the bond market can also squeeze risk assets. From most indicators, current valuations in the US stock market are quite high, particularly when compared to the risk-free returns investors can achieve by holding 10-year Treasury bonds to maturity. Data compiled by economist Robert Shiller shows that historically, this means that stocks are unlikely to outperform bonds over the next decade.

In light of this logic, Nick from NewEdge Wealth stated that investors should actually hold at least as many bonds in their portfolios as they normally would. "If you plan to hold long-term and do not frequently think about how to invest, it may be wise to hold more bonds. Bonds provide more value compared to the broad stock market."

However, even so, many people remain hesitant.

Yung-Yu Ma, Chief Investment Officer at Bank of Montreal Wealth Management, stated that if Trump's tariff measures further exacerbate inflation and federal budget deficits cannot curb the increase in Treasury supply, then the 10-year US Treasury yield is likely to rise above 5%.

He added that in hindsight, the low interest rate world of the 2010s seems to have begun to resemble a "perfect bubble" in the bond market.