The US Treasury market has outperformed stocks since Donald Trump’s presidential election, a trend some strategists believe has further room to run. This performance shift challenges the traditional “Trump trade” narrative of rising equities and higher Treasury yields.
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A Bloomberg gauge of US sovereign debt has returned 2.1% since the November 5, 2016 election, surpassing the S&P 500 Index’s 1.6% gain, inclusive of reinvested dividends. This haven demand for Treasuries was further underscored by escalating global trade tensions and the prospect of Federal Reserve easing.
Trade Tensions and Fed Easing Fuel Treasury Demand
The imposition of new tariffs on Canada and Mexico, coupled with the possibility of further Federal Reserve rate cuts, has strengthened the appeal of Treasuries. Investors are increasingly seeking the safety of government bonds amid growing economic uncertainty. Conversely, stock markets are facing downward pressure due to concerns about global growth prospects and potential overvaluation of market-leading companies like Nvidia Corp.
Recession Fears Bolster Bond Market Appeal
“It’s easy to envision the Fed cutting rates significantly this year, but much harder to imagine them tightening by the same magnitude,” notes Michael Brown, senior research strategist at Pepperstone Group Ltd. He adds that the combination of potential rate cuts and growing recession fears creates a compelling argument for investing in bonds. The yield on the 10-year Treasury note recently fell to a four-month low of 4.11% as investors sought refuge from potential economic headwinds.
Signs of slowing US economic growth, such as weakening factory activity, further enhance the attractiveness of fixed-income assets. This shift challenges the previous narrative of US economic exceptionalism.
Rethinking the “US Exceptionalism” Narrative
Morgan Stanley strategists, including Matthew Hornbach, suggest that the long-held belief in “US exceptionalism” is facing increasing challenges. They anticipate that US Treasuries will be a primary beneficiary as investors reassess this narrative in light of risks to global growth.
Declining Yields Across the Curve
Yields across the US Treasury curve have fallen in recent months as investors increasingly view tariffs as detrimental to US economic growth. This perspective has intensified as new tariffs take effect amidst signs of a weakening US economy.
Market expectations for Fed rate cuts have increased significantly, with swaps traders now pricing in approximately three quarter-point reductions by year-end. Hedge funds are also reducing their bearish positions on Treasuries, further indicating a shift in market sentiment. This evolving landscape suggests that the outperformance of Treasuries over stocks may continue.
Conclusion: A Potential Paradigm Shift in Market Dynamics
The recent outperformance of US Treasuries over stocks signals a potential paradigm shift in market dynamics. Driven by escalating trade tensions, expectations of Fed easing, and concerns about global growth, investors are increasingly favoring the safety and stability of government bonds. This trend challenges the prevailing “Trump trade” narrative and suggests a potential for continued strength in the Treasury market. This evolving landscape warrants close monitoring by investors seeking to navigate the complexities of the current market environment.
