US Bonds Rose as Recession Angst Fuels Haven Demand
US Treasuries surged and investors boosted their bets on Federal Reserve interest-rate cuts Monday as fear of a economic slowdown took hold across US markets.
The bond rally on Monday sent yields on the benchmark 10-year notes down as much as 10 basis points to 4.2% as US stocks posted their worst day of the year. The flight to safety came as traders also ramped up their expectations for Fed rate reductions this year, pricing in nearly 79 basis points of easing and a greater chance the next move comes in May.
“Growth risk — all else equal — seems to be tilted to the downside,” said Chitrang Purani, portfolio manager at Capital Group Inc. “Taking a little bit of duration in fixed income markets — particularly in the intermediate parts of the curve — that are more sensitive to growth and the path of Fed policy makes a lot of sense.”
The bond market moves on Monday were in sharp contrast with those in US equities. The Nasdaq 100 had its worst day since 2022 as traders grew more concerned about the health of the US economy after Trump said on Sunday it’s facing “a period of transition.”
Yields on two- through 10-year notes all fell at least 10 basis points during intraday trading, and traders increased their wagers on a Fed cut in May to 48% — from about 40% at Friday’s close. In options markets, traders were hedging in case the Fed amps up the pace of easing this year.
For now, though, the US central bank is widely expected to keep rates steady at its March meeting, as it did in January. The next rate cut isn’t fully priced in until June.
Over the weekend, Trump — who was asked whether he’s expecting a recession this year — said, “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.” That followed Treasury Secretary Scott Bessent’s remarks on Friday that there could be “a detox period” as the US reduces spending.
Investors are therefore growing more worried that US leaders will keep pushing their agenda even if growth takes a hit and markets tumble.
The consumer price index report for February will be released on Wednesday, and is expected to show a year-on -year increase of 2.9%, down from 3% in January. The February producer price index will be reported the following day.
Anshul Pradhan, head of US rates strategy at Barclays, and his colleagues told clients in a note Friday that the “markets are still understating the risk that well below trend potential growth will require a Fed response, even if lagged.” They recommended investors move existing long positions in two-year notes into Treasuries that mature in five years.
Purani, meanwhile, also said that Capital preferred buying five-year Treasury notes. Five-year notes are down about 40 basis points since the end of last year.
