Investors anticipate further decline in the US Treasury market as President Trump’s tariff threats loom, according to a Bloomberg Markets Live Pulse survey. This analysis from Hyperloop Capital Insights explores the survey findings and their implications for the Treasury market.
Persistent trade concerns could drive the 10-year Treasury yield to 4.80% within the next six months, reaching the upper bound of its recent trading range, according to the median estimate from 153 survey respondents. Over half of the participants predict the US will impose tariffs on at least some economies, while over a third anticipate universal levies.
Tariffs and the Treasury Market: A Complex Relationship
Historically, US Treasuries, backed by the government, have served as a safe haven during periods of market turbulence. However, the current situation presents a unique challenge. Tariff concerns exacerbate existing anxieties about persistent US inflation, fueling expectations that the Federal Reserve will maintain elevated interest rates for the foreseeable future. This outlook puts downward pressure on bond prices and keeps yields high. Concerns regarding US fiscal health have also weighed on the asset class in recent years. The interplay of these factors creates a complex environment for the Treasury market.
The Focus on 10-Year Treasury Yields
The upward trend in yields has garnered the attention of the Trump administration. Treasury Secretary Scott Bessent recently emphasized the administration’s focus on lowering 10-year Treasury yields, rather than the Fed’s benchmark short-term interest rate. This prioritization highlights the significance of the 10-year yield as an indicator of economic health and investor confidence.
Gold Emerges as the Preferred Safe Haven
Despite the ongoing trade tensions, the US stock market has demonstrated resilience, with the S&P 500 posting year-to-date gains of nearly 4% and approaching record highs. However, should volatility increase, investors appear hesitant to rely on government bonds. The survey reveals that only 22% of investors favor Treasuries as their preferred safe haven in the coming month. Gold, on the other hand, has emerged as the dominant choice, with 49% of investors selecting it as their top destination during market turmoil.
Inflation Concerns and the Federal Reserve’s Stance
Recent consumer inflation data exceeding expectations contributed to a rise in Treasury yields. However, yields retreated following producer price data indicating declines in components relevant to the Fed’s preferred inflation gauge. Federal Reserve Chairman Jerome Powell’s Congressional testimony reinforced the central bank’s intention to maintain its current interest rate policy, with investors now pricing in only one quarter-point reduction by year-end.
Trump’s Latest Tariff Salvo and Market Volatility
President Trump recently escalated trade tensions by targeting multiple trading partners and directing officials to propose new reciprocal tariffs on a country-by-country basis. This action adds to the uncertainty surrounding the future of global trade and its impact on financial markets.
Navigating Market Uncertainty: Volatility Bets and Currency Impacts
Given the unpredictable nature of tariff-driven market fluctuations, the prevailing strategy among survey respondents is to anticipate increased volatility in the coming six months. This sentiment is reflected in the surge in trading volumes within the foreign-exchange options market, where investors are actively seeking protection against potential currency swings. The Canadian dollar and Mexican peso, particularly vulnerable to Trump’s trade policies, are identified as the currencies most likely to underperform amid tariff-related volatility.
Conclusion: A Challenging Outlook for the Treasury Market
The survey findings paint a picture of growing unease among investors regarding the US Treasury market. Tariff concerns, coupled with persistent inflation and the Federal Reserve’s cautious stance on interest rates, create a complex and potentially volatile environment. As investors seek refuge in alternative safe havens like gold, the Treasury market faces significant headwinds. The coming months will be crucial in determining the ultimate impact of trade tensions on the Treasury market and the broader financial landscape. Hyperloop Capital Insights will continue to monitor these developments and provide timely analysis to our clients.
