- The US Treasury market was under pressure for the second consecutive trading day, influenced by strong retail sales data and energy inflation expectations triggered by geopolitical tensions, causing a temporary shift in the traditional pricing logic of safe-haven assets.
- The benchmark 10-year treasury yield (US10Y) was 4.288%, rising by 3.8 basis points in a day. The two-year treasury yield (US2YT=RR), reflecting interest rate expectations, rose to 3.779%, increasing by 6.3 basis points, with the yield curve showing typical bearish flattening characteristics.
- According to estimates by the London Stock Exchange Group (LSEG), market expectations for this year's rate cuts have narrowed further to about 10 basis points from 14 basis points on Monday evening, far below the pricing of over 50 basis points before the conflict, reflecting traders' reassessment of macroeconomic resilience.
Strong Macro Data Reshapes Policy Expectations
The latest disclosed economic data significantly deviates from the market consensus of a cyclical downturn. US March retail sales recorded a 1.7% increase month-on-month, far exceeding Reuters' survey forecast of 1.4%, and February data was also revised up to 0.7%. This data that exceeded expectations directly confirmed that US domestic demand remains strong despite high interest rates. Jefferies chief US economist Tom Simons noted that the rebound in car sales and increased gasoline spending supported the total data, but more surprising to the market was the resilience of other core consumer categories. There is currently no evidence that high oil prices have caused a crowding-out effect on consumption, lacking the baseline data support for the Federal Reserve to start a rate-cutting cycle in the short term. If retail sales continue to strengthen, the pricing range of terminal rates may face a new round of upward revision.
Geopolitical Premium and High-Frequency Energy Market Linkage
The volatility in the treasury market shows a high negative correlation with the price trends on the energy supply side. With the fragile US-Iran ceasefire agreement set to expire on Wednesday, the US Navy's boarding of a giant Iranian oil tanker at sea has triggered concerns about a substantial disruption in the crude oil supply chain. Combined with Iran's unconfirmed attendance at talks in Pakistan, New York crude oil futures (CL1!) jumped 2.8% to $92.10 per barrel. Noel Dixon, senior macro strategist at State Street in Boston, stated that the day's treasury market trends showed a highly consistent inverse fluctuation with oil prices. The rise in costs for underlying commodities like crude oil is typically seen as a precursor to secondary inflation, directly pushing up the market's breakeven inflation rate, forcing bond market investors to demand higher term premiums.
Interest Rate Swap Market Pricing Deviates from Fed Path
The microstructure of the interest rate futures market is undergoing profound changes. Catalyzed by the latest data release and geopolitical events, swap pricing shows that the market expects this year's rate cut to be only about 10 basis points, meaning less than one full rate cut is fully priced in for the year. This sharp revision of expectations is the core momentum for the short-end treasury’s steep drop. Investors are recalibrating the Federal Reserve's restrictive policy path, considering that the inflation trajectory may become more difficult due to external geopolitical risks. The market has started to price in a scenario where high rates are maintained for a longer period. If subsequent core price index shows signs of rebounding, rate cut expectations may be completely erased on the curve.
Structural Deconstruction of Bearish Flattening Yield Curve
With both short- and long-term yields rising, the spread between the two-year and ten-year treasury yields (US2US10=TWEB) has quickly narrowed to 50.6 basis points, further flattening compared to 52.5 basis points on Monday evening. This kind of bearish flattening in short-term rate expectations, rising much faster than long-term economic growth pricing, usually occurs during the fermentation stage of monetary policy tightening expectations. In the current macro environment, this suggests institutional investors believe the Federal Reserve will have to maintain a relatively hawkish stance in the short term to cope with potential imported inflation risks. If the 10-year yield effectively stabilizes above key technical levels, it may trigger a new round of duration selling pressure.
Resilience in Real Estate Market and Analysis of Immediate Safe-Haven Demand
In addition to retail consumption, the real estate sector, which is most sensitive to interest rates, also shows underlying resilience. Data from the National Association of Realtors (NAR) indicates that the March pending home sales index rose 1.5% to 73.7, significantly exceeding the expected 0.5%. This suggests that despite the 30-year treasury yield (US30YT=RR) slightly rising to 4.895%, increasing mortgage costs, there is still rigid home buying demand. Meanwhile, although geopolitical conflicts usually lead to inflows into US treasuries as a safe haven, the current situation has changed since the conflict strikes directly at the energy lifeline. Inflation risk weighs more in asset pricing than recession safe haven sentiment, leading to liquidity not flowing into long-term treasuries as expected, further weakening support for the bond market.
