The 2024 US rates outlook is expected to be a steeper path to normal, with the Fed cutting more aggressively than market pricing or Fed projections. The forecast predicts a fed funds rate below neutral in 2025. As cuts come into view, yields are expected to decline and the curve to steepen, supported by an above-consensus neutral policy rate and structurally higher term premia. The forecast predicts 2y and 10y UST yields ending next year at 3.15% and 4.05%, respectively. Under a baseline of mild recession and Fed cuts to actively ease the policy stance, QT will be phased out. In a soft-landing, QT will continue alongside rate cuts, likely extending into 2025. The Fed is keen to reduce the balance sheet, which raises the likelihood that QT continues. Funding stress risk has risen but is still seen as subdued by historical standards. The ON RRP is expected to fully drain around the middle of next year, making banks the marginal lender of cash. Rising repo rates will likely activate SRF usage. The Fed is also expected to make a technical adjustment that lowers the RRP rate by mid-year. Expectations of heavy issuance and duration supply are already embedded in market pricing, but as supply is absorbed by the market it should keep upward pressure on term premia. Demand is expected to be more balanced next year, with most groups of investors buying the same amount of or more Treasuries. The front-end and intermediate swap spreads are expected to be negative due to liquidity and funding, while the curve is expected to be moderately constructive.
