Recently, the U.S. bond market has undergone significant changes, with investor confidence in economic growth rapidly waning. Yields on U.S. Treasury securities have sharply declined, especially short-term bonds leading the drop, indicating heightened expectations for the Federal Reserve to cut interest rates earlier than anticipated. Traders warn that the uncertainty of Trump administration policies, including the tariff war and federal workforce reductions, might further suppress U.S. economic growth and increase the risk of stagnation.
The U.S. Bond Market Signals Recession
The latest trends in the U.S. bond market indicate that investors are bracing for an economic slowdown. Data shows that since mid-February, yields on two-year U.S. Treasury bonds have significantly retreated, with the market broadly expecting the Federal Reserve to cut rates as early as May to prevent further economic decline. A decrease in Treasury yields typically reflects pessimistic market forecasts about economic prospects, particularly when declines in short-term bond yields are more pronounced.
Gennadiy Goldberg, Head of U.S. Rate Strategy at TD Securities, stated, "Just weeks ago, the market was discussing whether the U.S. economy would accelerate again, but now, market sentiment has swiftly shifted to extreme pessimism."
Trump Policies Spark Economic Uncertainty
A key factor causing the dramatic swings in the Treasury market is the uncertainty surrounding Trump administration policies. Recently, plans to impose tariffs on Canada and Mexico and push for substantial government layoffs could affect U.S. economic growth and erode market confidence. Furthermore, Trump's unpredictable stance on trade wars causes doubts about the stability of America's corporate supply chains, impacting investor confidence.
The uncertainty in trade policy has directly intensified stock market volatility. Although Trump has temporarily delayed tariff increases on Mexico and Canada, market selling pressure remains unabated. Additionally, drastic federal budget cuts and the dismissal of tens of thousands of federal employees could further hinder economic growth.
Expectations of Early Federal Reserve Rate Cuts
Against the backdrop of declining Treasury yields, the market generally bets on the Federal Reserve cutting interest rates in the coming months to relieve downward economic pressure. The market now expects the Federal Reserve to lower interest rates by 0.75 percentage points this year, though the extent of further rate cuts remains uncertain.
Last week, Federal Reserve Chairman Jerome Powell stated that despite uncertainties in the economic outlook, "the U.S. economy is still in good shape" and that there is no immediate rush to adjust monetary policy. However, recent economic data suggests a slowdown in U.S. economic growth, with the Atlanta Fed's GDPNow forecast predicting a contraction in first-quarter GDP.
Furthermore, signs of weakness have emerged in the U.S. labor market. Although overall employment growth remained stable in February, the numbers of permanently unemployed rose, federal government jobs declined, and the number of people working part-time for economic reasons increased, all indicating a weakening employment market.
Inflation Pressures and Market Divisions
Despite escalating concerns about an economic recession, inflation data remains above the Federal Reserve's target. The latest forecasts indicate that the U.S. CPI annual growth rate for February is expected to be 2.9%, still above the Fed's 2% target level. This suggests that even if the Fed needs to cut rates to support economic growth, high inflation might impede policy adjustments.
However, trends in the bond market indicate that investors are more concerned with risks of slowing economic growth than with short-term inflation pressures. As Treasury yields continue to fall, bets on Federal Reserve rate cuts could further increase.
Rising Treasury Bonds, Stocks Under Pressure
Currently, the market is in a "bullish on bonds, bearish on stocks" trend. Investors generally believe that the Federal Reserve may act to cut rates sooner than expected to address challenges from economic slowdown. If economic data continues to weaken in the coming months, the bullish trend in the Treasury market may persist, putting more pressure on the stock market.
Going forward, adjustments in Federal Reserve policies, the Trump administration's economic moves, and developments in the trade war will continue to be key factors influencing market trends. Investors need to closely monitor upcoming economic data to assess the Fed's policy direction and the true state of U.S. economic growth.
