2025 is not going to be what we expect.
It will probably be the opposite.
But’s it’s OK. It creates opportunities.
Here are 5 potential surprises for 2025.
And don’t worry if you disagree with them.
They are surprises because no one says they will happen.
Surprise #1. 10 year yields go to 6%.
This is a key underpinning to how 2025 goes off the rails.
Look at the predictions below for the best asset class in 2025.
Nobody wants to own bonds. It is the least favorite asset class for 2025.
Private clients will own short dated treasuries, but are scared of the long end.
They are right to be nervous of 30 year treasuries. Yields seem low, government borrowing is out of control and yields could go much higher (prices lower).
Yet, on the other hand these same investors are happy to put $10 billion in to Databricks at 20x revenue and $0 of free cash flow (PE/VC Q4 2024 Deal Tracker). It’s the ultimate long duration asset.
This seems like a contradiction, but it isn’t.
The unspoken assumption is bonds are ‘the boy who cried wolf’. We will have a resumption of the post-GFC era of low yields.
“Yes, bond yields don’t makes sense, but don’t worry about it. The Chinese and Japanese will buy the bonds. They have to because they are scared of their currency appreciating.”
“The powers that be won’t let yields go higher.”
“Yes, the risk free rate is too low, but that just means it’s project Zimbabwe time! There is a free lunch out there so go get it. Plough money into OpenAI, Pacfic Fusion or Waymo, BTC at $100,000!”
But it is precisely the current zeitgeist about the benefits of inflation on risk assets which makes me cautious here. Inflationary trends are never a straight line. Instead, they are a bucking bronco. There are give and takes along the way between bonds and equities. Periods where bond yields reset higher and equities temporarily underperform. You don’t get the Zimbabwe style nominal GDP growth without higher yields too. They go together.
Here is a more in depth post on 6 reasons 10 years go to 6%.
Surprise #2: The 2026 outlook will be a recession
“Long and variable lags”….isn’t that what they say?
We’ve all forgotten about the yield inversion of 2022-2023. A record one by the way.
But that’s how it plays out.
There is the initial fear about the yield inversion, then markets keep pushing higher, so we get bullish and forget about it. We forget about it because the lag can be over 2 years.
It was this way in 1998-2000 and again in 2005.
Which means it would be right on schedule for the 10 year to move to 6% in 2025, creating a 2% spread between 2’s and 10’s.
Even higher rates will be a shocker for commercial real estate mortgages, leveraged loans and private credit which will need to refinance at 9-10% just when pension funds are hoping to finally get money back from these illiquid investments. It will create liquidity stress across the market. This could put pension funds in the position where they need to sell public equities, even though they’d rather not, to fund their liquidity needs.
Higher yields will also put the Federal government in a difficult position. Higher interest payments and continued 6-7% deficits will pressure the government to cut spending at the same time the economy is weakening. It’s a double whammy. But that was always the risk of running 7% deficits in the good times. It left no cushion for winter.
In this scenario credit spreads will widen and the investor outlook for 2026 will be that finally the real recession has arrived.
Which brings us to the next surprise.