US Treasuries weaken, credit markets freeze as traders price tariff risks
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The news: US bond markets showed signs of exhaustion after their biggest weekly rally since August, while credit markets stalled as Treasuries weakened in a volatile session on Monday with yields across all maturities briefly higher by at least 15 basis points.
The numbers: Yields on 30-year bonds fell to 4.32%, rose to 4.62% and landed at around 4.60% in late afternoon.
Yields across all maturities were briefly higher by at least 15 basis points during Monday’s session.
After falling below 3.9% in overnight trading, 10-year Treasury yields reversed course and climbed above 4.15%.
Traders’ bets on how much the Federal Reserve will cut rates this year fluctuated between three and five quarter-point cuts. Four cuts are now reflected in overnight interest-rate swaps, with the first fully priced in for June.
Meanwhile, credit spreads have widened sharply since President Donald Trump imposed sweeping tariffs, reaching the widest levels since November 2023. No new bond offerings were announced for a third day.
Bond issuance remains stalled after recent conditions saw companies, for the first time since the pandemic, unable to price deals to their liking, two syndicate bankers told Reuters.
"The most pressing question at this point is obviously what would begin to turn the narrative and give risk assets some respite from the aggressive selling of the past few sessions," BMO’s credit strategist Daniel Krieter said.
The context: US government bonds had acted as a haven in recent days, but yields surged as markets responded to fears that President Trump’s tariffs will both slow growth and push up inflation.
JPMorgan expects a recession this year and sees the Fed cutting in June and at each meeting through January. Goldman Sachs also changed its forecast, now expecting three cuts.
Trump’s tariffs have also intensified expectations that the European Central Bank will accelerate interest rate cuts, as recession fears outweigh inflation concerns for the bloc.
What they said: Former Federal Reserve Bank of New York president Bill Dudley – now a Bloomberg commentator - said stagflation has become the US’s best-case scenario.
Later, at a Q&A session in Harvard University Federal Reserve Governor Adriana Kugler said Trump’s trade policy has more pressing implications for inflation than for economic growth.
Kugler noted that changes in trade policy are already putting upward pressure on prices, even as frontloading of purchases ahead of tariffs may support early 2025 economic activity.
“If we tighten policy, we may weaken the economy. We ease policy, on the other hand, we may drive inflation higher,” Kugler said. “So we have to be very careful in how we navigate this period.”
The comments follow Jerome Powell’s speech on Friday, stressing policymakers will need to act with caution due to still-elevated inflation and the temporary price boost from tariffs.
The sources: Bloomberg, Reuters, The Wall Street Journal
