The US Treasury market experienced a significant surge on Monday, with investors piling into government bonds and increasing their wagers on Federal Reserve interest rate cuts as anxieties surrounding a potential economic slowdown gripped US markets. This dramatic shift reflects a growing concern over the health of the US economy and a potential policy pivot by the Federal Reserve.
The yield on the benchmark 10-year Treasury note plummeted by as much as 10 basis points to 4.2% amidst a broader market sell-off that saw US stocks record their worst daily performance of the year. This flight to safety underscored the prevailing unease among investors. Concurrently, market expectations for Fed rate reductions this year intensified, with traders pricing in nearly 79 basis points of easing and a heightened probability of the next rate cut occurring as early as May.
“Growth risk — all else equal — seems to be tilted to the downside,” noted Chitrang Purani, portfolio manager at Capital Group Inc. “Positioning in fixed income markets with a focus on intermediate-term bonds — which are particularly sensitive to growth and the trajectory of Fed policy — appears to be a prudent strategy in the current environment.”
The pronounced movements in the bond market stood in stark contrast to the performance of US equities. The Nasdaq 100 index suffered its most substantial single-day decline since 2022, as concerns regarding the robustness of the US economy escalated following comments from former President Trump on Sunday alluding to an impending “period of transition.”
Yields on Treasury notes with maturities ranging from two to 10 years all experienced declines of at least 10 basis points during intraday trading. Furthermore, the probability of a Fed rate cut in May, as implied by market pricing, surged to 48%, a notable increase from approximately 40% at the close of trading on Friday. Within options markets, traders engaged in hedging activities to mitigate potential losses in the event that the Fed accelerates the pace of monetary easing this year.
Despite the mounting speculation surrounding rate cuts, the prevailing consensus anticipates that the US central bank will maintain its current policy stance and hold interest rates steady at its upcoming March meeting, mirroring its decision in January. Current market pricing suggests that a rate cut is not fully priced in until June.
Over the weekend, former President Trump, when questioned about the likelihood of a recession this year, responded, “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.” These remarks followed comments made by Treasury Secretary Janet Yellen on Friday suggesting the possibility of “a detox period” as the US government implements measures to curtail spending.
Consequently, investor apprehension is growing regarding the potential for US policymakers to persist in pursuing their agenda even if economic growth falters and financial markets experience turbulence. This uncertainty is further compounded by the upcoming release of key economic data. The consumer price index (CPI) report for February, scheduled for release on Wednesday, is projected to reveal a year-on-year increase of 2.9%, a slight moderation from the 3% recorded in January. The producer price index (PPI) for February will be released the following day. These data points will likely play a significant role in shaping market expectations and influencing the Federal Reserve’s future policy decisions. As investors grapple with the prospect of an economic slowdown and the potential for a shift in monetary policy, the bond market remains highly sensitive to incoming economic data and any pronouncements from policymakers.
