US Treasuries surged and investors boosted their bets on Federal Reserve interest-rate cuts Monday as fear of a economic slowdown took hold across US markets.
The bond rally on Monday sent yields on the benchmark 10-year notes down as much as 10 basis points to 4.2% as US stocks posted their worst day of the year. The flight to safety came as traders also ramped up their expectations for Fed rate reductions this year, pricing in nearly 79 basis points of easing and a greater chance the next move comes in May.
“Growth risk — all else equal — seems to be tilted to the downside,” said Chitrang Purani, portfolio manager at Capital Group Inc. “Taking a little bit of duration in fixed income markets — particularly in the intermediate parts of the curve — that are more sensitive to growth and the path of Fed policy makes a lot of sense.”
The bond market moves on Monday were in sharp contrast with those in US equities. The Nasdaq 100 had its worst day since 2022 as traders grew more concerned about the health of the US economy after Trump said on Sunday it’s facing “a period of transition.”
Yields on two- through 10-year notes all fell at least 10 basis points during intraday trading, and traders increased their wagers on a Fed cut in May to 48% — from about 40% at Friday’s close. In options markets, traders were hedging in case the Fed amps up the pace of easing this year.
For now, though, the US central bank is widely expected to keep rates steady at its March meeting, as it did in January. The next rate cut isn’t fully priced in until June.
Over the weekend, Trump — who was asked whether he’s expecting a recession this year — said, “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.” That followed Treasury Secretary Scott Bessent’s remarks on Friday that there could be “a detox period” as the US reduces spending.
Investors are therefore growing more worried that US leaders will keep pushing their agenda even if growth takes a hit and markets tumble.
The consumer price index report for February will be released on Wednesday, and is expected to show a year-on -year increase of 2.9%, down from 3% in January. 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.
Purani, meanwhile, also said that Capital preferred buying five-year Treasury notes. Five-year notes are down about 40 basis points since 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 German government debt. 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. Strategists at BNP Paribas SA say US growth concerns are overblown and warn that the degree of Fed rate cuts priced in now could moderate. Additionally, they say much of the recent moves in government debt yields were due to supply-demand dynamics, especially in Europe.
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.
“There’s clearly less of a fiscal impulse making its way through the US economy,” Steve Boothe, portfolio manager and head of investment grade at T. Rowe Price, said. “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.”
For Boothe, the job market is likely to weaken further this month, leading to increased wagers on a Fed cut in May. That could spark 10-year yields to move closer to 4%, he said.
He said the market foresees lower inflation, such as that “January inflation will be the cyclical high for the next couple of months to quarters.”
