MW Why these analysts expect no rate cuts in 2025, as corporate bond ETFs retreat from Fed-sparked rally

By Christine Idzelis

CreditSights analysts say the remain 'comfortable' with their call for no Fed rate cuts in 2025

The Federal Reserve sparked some appetite for risk-taking in markets on Wednesday, but that seemed to fade on Thursday as investors continued to assess the Fed's monetary policy stance against a stagflationary shift in its economic projections and ongoing tariff worries.

The U.S. stock market closed modestly lower Thursday, while corporate bonds also appeared under some slight selling pressure.

For example, the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, which tracks an index of U.S. investment-grade bonds, fell 0.2%, while the iShares iBoxx $ High Yield Corporate Bond ETF HYG, which provides broad exposure to U.S. corporate bonds rated below investment grade, was down 0.1%, according to FactSet data.

While markets seemed to take the outcome of the Fed's policy meeting on Wednesday as a "dovish" event, CreditSights analysts said in a note Wednesday that they viewed it as "hawkish." In other words, the analysts expect the Fed might not be able to cut rates as much this year as traders anticipate.

The Fed's summary of economic projections, released on Wednesday along with its policy statement, showed members of the Federal Open Market Committee expect slower growth this year than forecast in December but continued to pencil in two interest-rate cuts in 2025. They also revised higher their projections for inflation and the unemployment rate this year.

"The Fed left its policy rate expectations unchanged with the stagflation-like adjustments to the economic forecast," the CreditSights analysts said. "We remain comfortable with our call for no Fed cuts this year" because of elevated inflation, the analysts said, adding that they also expect Treasury yields to increase from current levels.

Corporate spreads reflected some of the positive sentiment in markets on Wednesday.

So-called spreads on corporate bonds in the U.S., or the premium that investors receive over comparable Treasurys for taking credit risk, looked "broadly tighter" on Wednesday as investors considered the Fed's policy stance and economic projections, CreditSights analysts said in note.

Credit spreads on U.S. investment-grade bonds tightened two basis points to 0.91 percentage point on Wednesday; spreads fell four basis points on high-yield bonds to 3.19 percentage points, according to the website of the Federal Reserve Bank of St. Louis, which cited Ice Data Indices as its source.

Exchange-traded funds focused on corporate bonds rallied after the Fed's meeting Wednesday.

The iShares iBoxx $ Investment Grade Corporate Bond ETF climbed 0.6% that day while the iShares iBoxx $ High Yield Corporate Bond ETF rallied 0.7%, according to FactSet data.

While the Fed's decision on Wednesday to keep its benchmark interest rate unchanged at a target range of 4.25% to 4.5% was widely anticipated, traders appeared to cheer its announcement that it planned to slow its pace of quantitative tightening.

"The one surprise to our forecast was that the FOMC slowed the pace of balance sheet runoff one meeting sooner than we had expected due to concerns related to the debt limit," said David Mericle, chief U.S. economist at Goldman Sachs, in a note on Wednesday evening.

Quantitative tightening, or QT, involves the reduction in the holdings of debt securities on the Fed's balance sheet.

"Beginning in April, the monthly cap on Treasury redemptions will be lowered from $25 billion to $5 billion," said Powell. "This action has no implications for our intended stance of monetary policy and should not affect the size of our balance sheet over the medium term."

With respect to the Fed's "technical" decision to slow QT, Powell said "we have seen some signs of increased tightness in money markets" while also indicating that reserves remain "abundant."

CreditSights analysts said they had anticipated a "full pause" to QT.

Meanwhile, evolving White House policies under President Donald Trump, including recent developments in tariffs, have created uncertainty for investors as well as the Fed.

Powell indicated that against the backdrop of changing policies "uncertainty is remarkably high" for the economic outlook. On the trade policy front, reciprocal tariffs may be announced April 2.

See: Tracking Trump's tariffs: What he's proposed, when they hit and what could get more expensive

Investors have worried tariffs risk hurting economic growth and increasing inflation.

Powell remarked Wednesday that it will be difficult to precisely assess how much of inflation stems from tariffs while also saying that tariff-related inflation could be "transitory."

Major U.S. stocks index finished lower Thursday as Treasury yields fell, with S&P 500 SPX retreating 0.2%, the technology-heavy Nasdaq Composite COMP shedding 0.3% and the Dow Jones Industrial Average DJIA slipping less than 0.1%, according to FactSet data. All three major benchmarks had climbed on Wednesday.

In the bond market, the yield on the 10-year Treasury note BX:TMUBMUSD10Y fell 2.4 basis points Thursday to 4.233%, down a fourth straight day, according to Dow Jones Market Data.

-Christine Idzelis

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March 20, 2025 17:14 ET (21:14 GMT)

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