Treasuries rallied as President Donald Trump’s comments on Sunday that the US economy is facing “a period of transition” added to concern that an economic slowdown could be just around the corner.
The advances pushed the yield on three- to 10-year yields lower by 10 basis points on Monday, with the moves accelerating as US equities sold off. Five-year yields fell to 3.98%, while benchmark 10-year yields were down to 4.2% as investors fretted about the impact of tariffs and federal job cuts on growth. Meanwhile, two-year yields — which are most sensitive to the outlook for the Fed’s monetary policy rate — declined about nine basis points to 3.91%.
RELATED: Fed in wait-and-see mode on White House priorities
Swaps traders are pricing in that the Fed reduces rates by about 75 basis points by year’s end. A full quarter-point cut isn’t fully priced in until June, with odds for such a move in May at just under 40%. The US central bank is widely expected to keep rates steady at its March 18-19 gathering, mirroring a lack of action at its January meeting.
When asked whether he’s expecting a recession this year, Trump said, “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.” And on Friday, Treasury Secretary Scott Bessent talked about “a detox period” as the US moves away from public spending.
That’s damping investors’ faith that the US will change course on its policy if markets tumble, an assumption that had previously helped calm jitters.
READ MORE: Mortgage rates fall again but streak is now in jeopardy
Steve Boothe, portfolio manager and head of investment grade at T. Rowe Price sees “more job pressure building to the next payroll report” due in April, set to spark traders to boost wagers on the Fed slashing rates in May. That could spark 10-year yields to move closer to 4%, he said.
“There’s clearly less of a fiscal impulse making its way through the US economy, it was bound to decelerate cyclically anyway, but that’s being accelerated with some of the spending and job cuts that you’re seeing at the Federal level,” Boothe said. And the market foresees lower inflation ahead with “January inflation will be the cyclical high for the next couple of months to quarters.”
The consumer price index report for February will be released on Wednesday, and is expected to show a headline yearly increase of 2.9%, compared to January’s 3% level. The February producer price index will be reported the following day.
Anshul Pradhan, head of US rates strategy at Barclays, and his colleagues told clients in a note Friday that the “markets are still understating the risk that well below trend potential growth will require a Fed response, even if lagged.” They recommended investors move existing long positions in two-year notes into Treasuries that mature in five years.
Five-year notes are down almost 40 basis points compared to the end of last year.
Wall Street’s Views
Rates strategists are already adapting to this period of elevated volatility globally.
With yields surging across Europe on the prospect of higher spending, Citigroup recommended that investors short Treasuries versus bunds. JPMorgan Chase & Co., meanwhile, lowered its interest-rate forecasts on risks to US growth.
“The risks skew towards lower yields over the medium term driven by more extreme US policy decisions” and “shifting risks around the growth outlook,” JPMorgan strategists Jay Barry, Phoebe White and others wrote in a note to clients.
Not everyone sees the economy poised for trouble. Strategist at BNP Paribas SA says US growth concerns are overblown and warn that the degree of Fed rate cuts priced in now could moderate ahead. Additionally, they say much of the recent moves in government debt yields were due to supply-demand dynamics, especially in Europe where bund yields have surged.
The firm expects German bunds yields to stabilize and long-term Treasuries to be supported by the prospects that Treasury Secretary Scott Bessent could keep note and bonds sales steady through 2027.
Last month, Bessent said any move by his debt management team to boost the share of longer-term Treasuries in government debt issuance is some ways off. Many Wall Street dealers have predicted such increases would come sometime later this year
Still, to Michael Zezas, head of fixed income and public policy research at Morgan Stanley, Trump’s policies should lead to lower bond yields and a more dovish Fed in 2026. He said on Bloomberg Television on Monday that he favors US bonds over stocks.
Trading on Trump
Fed officials are in their standard pre-meeting media quiet period, so there will be no chance for investors to garners any insights from policy makers directly until after the upcoming meeting wraps.
“The idea of a ‘Trump put’ is clearly wide of the mark, and the administration is doubling down on the ‘short-term pain for long-term gain strategy,'” said Michael Brown, senior research strategist at Pepperstone Ltd. “The degree of uncertainty remains incredibly elevated, most notably in terms of US trade policy, so it’s no surprise that participants continue to trade with a defensive bias.”
Last week, levies on Mexico and Canada were introduced, only to be scaled back for goods covered by the North American trade agreement until April 2. Meanwhile, the push to cut government jobs is continuing, albeit with more nuance.
Benchmark Treasury yields have been sliding over the past month. The moves have subverted a key Trump trade — a term used to describe a clutch of strategies purported to capitalize on the president’s policies — that saw investors bet on rates rising to reflect the inflationary impact of tariffs. Stocks have erased their post-election gains and the US dollar is down more than 4% from its peak.
That’s shaking the aura of economic and market exceptionalism that has dominated for more than a decade.
“They seem to be telling us that they are prepared for some pain to reorientate the economy,” Jim Reid, global head of macro research and thematic strategy at Deutsche Bank AG, wrote in a note. “Taken at face value these quotes suggest that their pain level is higher than most would have believed a few weeks ago.”
