Bond traders are increasingly signaling concerns that the U.S. economy may be headed for a slowdown, as President Donald Trump’s controversial tariff policies and planned federal workforce cuts weigh on economic growth. Expectations that Trump’s presidency would fuel economic expansion and keep Treasury yields rising have rapidly faded, replaced by fears of a potential recession.
Just weeks ago, market sentiment was largely optimistic, with traders speculating that the U.S. economy would continue to accelerate. However, that optimism has been quickly overshadowed by recession fears. Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, remarked, “The market’s gone from exuberance about growth to absolute despair,” highlighting the dramatic shift in mood.
This shift marks a notable reversal for the Treasuries market, where yields had previously risen on hopes for stronger growth under Trump. However, since mid-February, Treasury yields have sharply fallen, driven largely by short-term securities. This shift typically indicates investor expectations that the Federal Reserve may need to cut interest rates to boost a flagging economy.
A key factor contributing to the change in sentiment is Trump’s escalating trade war, which is expected to raise inflation and disrupt global supply chains. This has already led to a sell-off in the stock market, which continued despite Trump delaying tariff hikes on Mexico and Canada. Additionally, Trump’s policies to reduce federal funding and fire thousands of government workers are further stoking fears of a downturn.
Tracy Chen, portfolio manager at Brandywine Global Investment Management, acknowledged the growing recession risks, attributing them to Trump’s policies—specifically, the sequence of implementing tariffs before tax cuts.
Despite these concerns, Trump tried to calm fears, stating on Sunday that the U.S. economy is merely undergoing “a period of transition.” In the wake of his comments, Treasury bonds rallied in Asian trading on Monday, with the 10-year yield falling by three basis points to 4.27%.
The shift in sentiment is also evident in the divergence between U.S. and European bond markets. While German bond yields surged in response to expectations of increased defense spending, U.S. Treasuries remained relatively stable.
Although bond traders have been cautious in the past, anticipating economic downturns that never materialized, the growing expectation of three rate cuts by the Fed this year suggests that recession fears are becoming more tangible. Federal Reserve Chairman Jerome Powell recently indicated that the U.S. economy is still “in a good place,” despite heightened uncertainty. However, inflation could continue to exert upward pressure on yields, as the consumer price index for February is expected to show a year-on-year increase of 2.9%, well above the Fed’s 2% target.
Signs of economic cooling have been mounting, including the Atlanta Fed’s GDPNow, which is forecasting a contraction in U.S. GDP for the first quarter. Although job growth remained strong in February, the Labor Department report revealed signs of a softening labor market, with more people permanently unemployed and a rise in part-time workers.
Bloomberg strategist Edward Harrison noted that while the headline jobs report appeared strong, deeper analysis revealed troubling signs for the economy. The labor data supports earlier expectations for Fed rate cuts and contributes to growing recession fears, continuing to fuel the bond market’s bullish stance and the stock market’s bearish outlook.
Looking ahead, the bond market’s trajectory will largely depend on how Trump’s policies unfold. Treasury Secretary Scott Bessent acknowledged potential disruptions from the administration’s actions but expressed confidence in the long-term outlook. Trump, on Thursday, responded to concerns about aggressive cost-cutting by urging cabinet members to use a “scalpel” rather than a “hatchet” when reducing government jobs. However, despite these reassurances, he has continued his tariff war, raising them on China and planning more hikes against other trade partners.
The shift in market sentiment reflects a major change in outlook. As Brandywine’s Chen observed, “Prior to this tariff war, the market thought tariffs were inflationary, and now people think they are recessionary. This is a great shift.”
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