Throughout 2024, the United States has outperformed growth expectations consistently. Initially, economists expected the economy to grow by about 1.2% for the year. However, the estimate had almost doubled when the year came to an end, with a significant portion of that adjustment occurring in just the fourth quarter. As per Kavan Choksi, robust growth that exceeds expectations also puts upward pressure on yields as the number of rate cuts anticipated by the Federal Reserve goes down.

Kavan Choksi discusses the impact on U.S. Treasury yields since the Fed started cutting rates

Economic uncertainty is a huge factor that contributes to the upward pressure on yields. There have been concerns in regards to where Federal Reserve rates may land over the next couple of years, and what the policies of the new administration may mean for inflation and the Fed’s outlook. However, a recent sell-off in bond yields does not seem to reflect increased concerns about the U.S. deficit. The yields on longer-dated government bonds in comparison to interest swaps, which do not face the same supply and demand dynamics, have stayed stable since the middle of 2025. This contrasts with the increasing discount assigned to long-dated sovereign debt in the United Kingdom, where investors have expressed concerns over the ability of the country to service its debt. Overall, 2024 had been a strong year for investment performance in the United States, marked by its resilient economy, healthy consumer demands and low unemployment.

Fed rate hikes seem off the table for now. The United States labor market has not re-tightened yet. Moreover, sectors that are sensitive to interest rates are still lagging. The increase in wages paid to employees peaked in 2022 at 5.1%. However, since then, the figure has continued declining to 3.9%. This basically means that employers believe that they can offer smaller wage increases to the employees, without risking them leaving for other jobs. This has been the case so far. So far, that has been the case. The quits rate is often considered an indicator of workforce confidence as employees are less likely to leave their jobs if they doubt their ability to find new ones. This rate has dropped to its lowest level in five years. Moreover, sectors that are sensitive to interest rates have lagged behind the broader market since 2023 when the Federal Funds Rate exceeded 5%. This performance gap is likely to diminish as the economy gets close to the equilibrium rate that neither boosts nor restrains economic growth.

As Kavan Choksi mentions, the Federal Reserve is unlikely to raise interest rates further, and current rates appear to be priced aggressively high for that scenario. Now it’s time to think about what this means for investment portfolios. For United States taxpayers, shifting from cash to municipal bonds, currently yielding above their 25-year average, can provide tax-advantaged income and potential capital gains as yields decline. For international investors, European duration offers attractive elevated yields.  For investors willing to take on higher credit risk, U.S. preferred securities and direct lending present opportunities with yields that approach double digits.