The Federal Reserve’s monetary policy decisions ripple through markets, affecting everything from mortgage rates to bond prices. With the Fed signaling potential rate cuts in the last half of 2025, traders and consumers stand to benefit. This article examines how three anticipated rate cuts before year-end could impact markets, the seasonal patterns driving Treasury price movements, and the geopolitical factors that may amplify demand for safe-haven assets, such as U.S. Treasuries. It also challenges readers to consider interest rates as a key component of asset allocation and highlights tradable instruments, such as Treasury futures and ETFs.
The Federal Reserve, tasked with balancing inflation and economic growth, may lower its benchmark federal funds rate three times by the end of 2025. The CME Group FedWatch currently indicates that by the end of the year, Fed funds could be trading at 3.50-3.75%, down from the current yield of 4.25-4.50%.
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Source: CME Group Exchange
Each cut, likely by 25 basis points, would reduce borrowing costs, stimulating spending and investment. For consumers, this means cheaper loans—mortgages, auto loans, and credit card rates could ease, freeing up disposable income. For traders, lower rates typically weaken the dollar and boost demand for riskier assets, such as equities, but they also impact bond market prices.
While the Fed directly controls short-term rates, its actions create a tailwind for the longer end of the yield curve, including the 10-year Treasury note. Lower fed funds rates signal an accommodative policy, encouraging investors to accept lower yields on longer-dated Treasuries. This dynamic pushes Treasury prices higher, as bond prices move inversely to yields. For example, if the 10-year yield drops from 4.3% to 3.8%, the cost of a $1,000 Treasury note could increase by approximately $40, depending on the note’s duration and market conditions. Traders can capitalize on this through various instruments, which we’ll explore later.
Source: Moore Research Center, Inc. (MRCI)
Historical research from Moore Research Center, Inc. (MRCI) highlights a seasonal tendency for Treasury prices to rise and yields to fall in July. This pattern holds across the 5-year, 15-year, and 30-year seasonal patterns, implying that the fundamentals during this period have been relatively consistent, driven by market dynamics and investor behavior. July often sees reduced trading volumes due to summer slowdowns, which can amplify price movements in bonds. Investors may rebalance their portfolios in the third quarter, as the end of September marks the Federal government’s year-end, which is expected to increase demand for Treasuries.
This seasonal trend offers traders a potential edge. For instance, MRCI data shows the 10-year Treasury note often rallies in July, with prices rising as yields dip. This could be a short-term opportunity for those positioned in Treasury futures or ETFs. However, seasonality is not a guarantee; traders must combine it with other analyses, such as technical indicators or macroeconomic trends, to make informed decisions.
Geopolitical tensions often prompt investors to seek safe-haven assets, such as U.S. Treasury securities, particularly during periods of market volatility. Currently, the Iran and Israel conflict is in a ceasefire. However, if either party breaches the truce during July, we could see more extreme scenarios, such as the closure of the Strait of Hormuz, which would lead to heightened uncertainty and prompt a flight-to-quality buying response. Similarly, nervous investors wary of stock market volatility—potentially triggered by earnings disappointments or global economic slowdowns—may rotate into bonds for stability.
This flight-to-quality effect can amplify the seasonal pattern. If equity markets wobble, Treasuries become a refuge, especially for institutional investors managing large portfolios. The 10-year Treasury, a global benchmark, often sees the most pronounced price increases during such periods. Traders should monitor geopolitical headlines and equity market trends to gauge potential inflows into Treasuries.
Source: Barchart
The September 10-Year Treasury has now traded above the 50-day simple moving average (SMA) and closed above it for multiple days. As the market has traded to a new level above the SMA, the price action is revealing the beginning of higher highs and higher lows. Additionally, the SMA is beginning to turn upward as the market finds value at higher levels.
For those looking to trade these dynamics, several instruments offer exposure to Treasury price movements:
10-Year Treasury Futures (ZN): Traded on the CME Group Exchange, these contracts allow traders to speculate on or hedge against changes in 10-year Treasury yields. They’re highly liquid and sensitive to shifts in Fed policy.
Micro-Yield Treasury Futures (TO): Also offered by CME Group, these smaller contracts provide a cost-effective way for retail traders to gain exposure to yield movements with lower capital requirements.
TLT ETF: The iShares 20+ Year Treasury Bond ETF (TLT) tracks long-dated Treasuries, offering a way to bet on rising bond prices without directly trading futures. It’s accessible through most brokerage accounts. Due to the high correlation between the 10-, 20-, and 30-year Treasuries, the TLT can serve as a proxy for equity trades for traders.
Options on TLT or Futures: Options provide leveraged exposure to Treasury price movements, allowing traders to speculate on volatility or hedge existing positions.
These instruments suit various risk profiles, from conservative hedging to speculative bets. Studying interest rate trends can enhance portfolio diversification, complementing equities or commodities. Challenge yourself to explore rates as an asset class—understanding their interplay with macroeconomic and geopolitical factors can unlock new opportunities.
This article outlined how the Federal Reserve’s anticipated three rate cuts before the end of the year could lower borrowing costs for consumers and create a tailwind for higher Treasury prices. We examined the seasonal pattern of rising Treasury prices in July, as supported by MRCI research, and highlighted geopolitical risks, such as Middle East tensions, that may drive a flight-to-quality buying trend. Nervous investors shifting from volatile equities could further boost demand for Treasuries. Tradable assets, such as 10-year Treasury futures, micro-yield futures, the TLT ETF, and options, offer ways to capitalize on these trends. By studying interest rates, readers can diversify their asset allocation and potentially profit from both seasonal and event-driven opportunities in the Treasury market.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
