From a global macroeconomic perspective, the U.S. bond market on April 6 was not just an ordinary safe-haven movement, but rather a reflection of how energy supply shocks are reshaping the "growth-inflation-policy" triangle. The market originally expected to continue moving into a rate-cutting cycle in 2026, but the Middle East conflict caused oil prices to surge significantly in a short period. This increase in transportation and intermediate product costs affected the service industry, causing long-term U.S. bonds to reflect growth concerns, while short-term bonds remained anchored by inflation expectations and the Federal Reserve's cautious stance. The intraday flattening you mentioned reflects this macroeconomic contradiction in pricing.
Growth and Inflation
Signals on the growth side are no longer as strong as they were in previous months. The ISM Services PMI fell to 54.0, the Business Activity Index dropped to 53.9, and the employment component declined to 45.2, indicating that the service industry is becoming more cautious about future demand and employment. Meanwhile, the price component rose to 70.7, the highest since October 2022. This means that the U.S. economy is experiencing a combination of "slower activity but hotter prices," which is not favorable for bond bulls.
Cross-Asset Implications
On the cross-asset level, the dollar remains relatively strong, oil prices are volatile at high levels, and stocks have not significantly collapsed. This indicates that the market has not priced risk scenarios into a "full recession," but is more akin to a "stagflationary drag." According to a Reuters report on April 7, the dollar index is near 100, Brent crude is hovering around $110, and traders no longer factor in a Fed rate cut this year. Simultaneously, U.S. stocks remain resilient, with the Nasdaq and S&P continuing their multi-day rebound. This combination suggests that even though long-term U.S. bonds may gain safe-haven support, they are constrained in their rebound potential by higher uncertainty over nominal growth and inflation compensation.
Policy Path
On the policy front, the Federal Reserve maintained interest rates between 3.50% and 3.75% in March and left room for only one rate cut prediction within the year. Subsequently, officials including Alberto Musalem emphasized that the current policy stance remains suitable for observation, with the key question being whether the energy shock will evolve into more persistent inflation. If the Hormuz Strait reopens and oil prices drop, the market may resume discussions on easing by the end of the year. However, if supply chain pressures continue to rise, what the New York Fed calls a "significant supply shock" may cause interest rate futures to further delay the time for rate cuts.
