David Rosenberg's 2025 Outlook: Recession Risks, Treasury Opportunities, and the Case for Bonds (May 30, 2025)

Why David Rosenberg is a "Restrained Bull" on Bonds (YouTube link)

David Rosenberg, founder of Rosenberg Research, discusses current market dynamics and economic risks with Maggie Lake, emphasizing concerns about rising U.S. Treasury yields, fiscal policy uncertainty, and a potential recession. 

Key Points

• Rising Treasury Yields and Market Signals: 
• The recent surge in Treasury yields is driven by a high term premium, reflecting uncertainty over trade tariffs and fiscal policy, not inflation or economic growth expectations. 
• This rise in yields is an exogenous shock, not tied to Federal Reserve actions or a strengthening economy, and historically, bond market movements lead stock market corrections.
• Economic Weakness and Recession Risk:
• Rosenberg believes the economy is weaker than perceived, with softening GDP trends, declining labor demand (evident in JOLTS data), and a housing market downturn signaling broader economic slowdown.
• The real Fed funds rate, now over 2%, is at levels seen before past recessions, supporting his view that a recession is likely by Q3 2025.
• Fiscal and Tariff Concerns:
• The fiscal situation, with large deficits and proposed policies like tariff hikes, is unsettling the bond market, adding a fiscal premium to yields.
• Tariffs (effective rate now at 17%, up from 2.5%) are likely to raise consumer prices, reduce purchasing power, and contribute to demand destruction, potentially exacerbating economic weakness rather than driving sustained inflation.
• Investment Outlook:
• Rosenberg is bullish on U.S. Treasuries, expecting yields to fall in a recession as credit demand from households and businesses contracts, offsetting increased government borrowing. He predicts double-digit returns for 10- and 30-year Treasuries over the next 12 months.
• He is bearish on U.S. equities, citing a high S&P 500 forward multiple (21x) and a negative equity risk premium, suggesting overvaluation. He favors non-U.S. equities (e.g., Canada, Asia, Europe) with lower valuations and stronger currencies.
• Gold is recommended as a hedge against a weakening U.S. dollar, which he sees declining due to policy shifts and lack of Fed support.
• Fed Policy and QE:
• The Fed has little control over long-end yields, which are driven by market forces. Rosenberg expects the Fed to resume quantitative easing (QE) in a recession to lower rates, as seen in past downturns.
• Current Fed policy is tight, with the real funds rate in restrictive territory, and markets are underpricing the likelihood of significant rate cuts.
• Countering Narratives:
• Rosenberg dismisses the idea that Treasuries are “uninvestable” due to fiscal deficits, noting that deficits typically rise in recessions, but private sector credit demand falls, supporting bond rallies.
• He rejects the notion that the 60/40 portfolio is dead, arguing that Treasuries and equities have different risk profiles, making bonds a vital diversifier with guaranteed income and capital return.
• Dollar and Global Context:
• The U.S. dollar is weakening despite the Fed’s relatively tight policy, possibly due to deliberate policy shifts or loss of confidence in U.S. economic management.
• Other regions (e.g., Europe, Japan) face their own fiscal and monetary challenges, but their lower equity valuations and rate-cutting central banks make them attractive investment destinations.

Conclusion

Rosenberg anticipates a U.S. recession by Q3 2025, driven by tight monetary policy, tariff shocks, and fiscal uncertainty. He sees Treasuries as a compelling investment due to expected yield declines and coupon protection, while advising caution on U.S. equities and favoring gold and non-U.S. markets. His outlook hinges on the economy weakening, which he believes will surprise markets and prompt Fed action.