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Investors aren't feeling good about the bond market heading into the new year.
Traders have pulled $5.3 billion from BlackRock's iShares 20+ Year Treasury Bond ETF this month, putting monthly outflows on track for their highest levels in the fund's 22-year history.
Those outflows could be a sign of trouble ahead as investor confidence in longer duration bonds, Rosenberg Research says. Bond yields, meanwhile, have jumped this month, with the market repricing based on the Federal Reserve's outlook for fewer cuts ahead.
"Bond market sentiment could scarcely be worse than is currently the case," the firm's founder, David Rosenberg, wrote in a Monday note.
As investor attitudes toward bonds sour, stock market sentiment has continued to surge. Wall Street forecasters broadly expect another year of strong returns in 2025, with the S&P 500 expected to deliver an average gain of around 10% next year after back-to-back years of over 20% returns.
The most bullish targets, from firms like Oppenheimer and Wells Fargo, see gains of more than 17% in 2025.
With bullishness running high, the bond market could be flashing contrarian signs of caution heading into the New Year, Rosenberg said.
"Perhaps this will prove to be a great contrary indicator heading into 2025," he wrote.
Rosenberg added that waning bond sentiment is a result of both hawkish commentary from the Fed and expectations for president-elect Donald Trump's trade and fiscal policy.
The Fed delivered a 25 basis point cut earlier this month in its third consecutive cut of the year but dialed down the outlook for further cuts in 2025.
Chair Jerome Powell said the Fed can afford to move more cautiously in its coming decisions, emphasizing the risk of undermining any progress on bringing down sticky inflation.
As a result, bond investors now just one or two more interest rate cuts from the Fed in 2025, compared to previous expectations of at least four, Rosenberg said.
"Powell and crew have scared off the bulls, at least for now," he wrote.
Meanwhile, inflation risks from Trump's proposals for sweeping tariffs on key trading partners like China and Canada, plus a crackdown on immigration, have similarly scared investors away from extending duration, Rosenberg said.
"It's not just the Fed, but Donald Trump's trade and fiscal posture have also scared investors away from extending duration," he wrote.
