Lombard Odier Asset Management has shifted its stance to bullish on US Treasuries, ending a five-year period of bearish sentiment. This change is primarily driven by their belief that the Federal Reserve's monetary policy has become the dominant factor influencing US bond yields. They argue that the Fed has regained its control over the entire yield curve, superseding concerns about inflation and fiscal deficits, which were previously key drivers of volatility in long-end yields throughout 2024.
According to Florian Ielpo, Head of Macro at Lombard Odier, the unexpected fall in long-term bond yields in September 2025, with US 10-year Treasury yields declining by approximately 20 basis points and flirting with the 4% threshold, demonstrated the Fed's gravitational pull. This rally, despite persistent structural headwinds like inflation and mounting fiscal risks, is attributed to market expectations of an aggressive cutting cycle by the Fed. Markets are currently pricing in two to three rate cuts in the coming months, mainly due to unemployment concerns, a decline in leading indicators, and deteriorating consumer survey data.
Lombard Odier’s analysis suggests that growth has now surpassed inflation as the primary concern for US policymakers, paving the way for a series of rate reductions. While three cuts in six months might lead to a modest 3-5 basis points decline in yields, a faster pace of six cuts could drive 10-year yields lower globally by approximately 20 basis points, mirroring the September 2025 rally. For this dynamic to persist, the Fed needs to deliver the anticipated cuts and provide explicit forward guidance about their continuation. The firm sees bonds as a valuable component for diversification in their multi-asset strategy, especially given the dovish rates context and potential headwinds for equity markets from a soft US job market.
