U.S. Treasury Yields to Decline Amid Economic Concerns

By Sarupya Ganguly
BENGALURU (Reuters) – U.S. Treasury yields are expected to decline, as bond strategists surveyed by Reuters predict that an economic slowdown resulting from President Donald Trump’s unpredictable tariffs will lead the Federal Reserve to reduce interest rates.

While there are rising inflation expectations creating hesitance among Fed policymakers regarding rate cuts, nearly half of the survey participants expressed concerns about the safe-haven status of U.S. Treasuries.

A significant sell-off last week, attributed to hedge funds unwinding large leveraged positions, resulted in the benchmark 10-year Treasury yield climbing by over 70 basis points to a nearly two-month high of 4.59%.

Trump’s unexpected 90-day delay on reciprocal tariffs, excluding China, has stabilized markets, but investor sentiment has deteriorated significantly, sparking speculation about a potential mass exit from U.S. assets.

In a follow-up question, 15 out of 32 strategists indicated worries about the Treasuries’ safe-haven status, contrasting with over one-third of FX analysts sharing similar concerns regarding the dollar in a previous Reuters poll.

Despite healthy demand at a recent 10-year Treasury auction, major U.S. banks have issued warnings about the market state. Goldman Sachs noted recent volatility has exposed vulnerabilities in the Treasury market that may persist.

Currently, over 50 bond strategists predict the 10-year yield will decrease from about 4.38% to a median of 4.21% by the end of June, and further to 4.14% within a year.

Treasury market volatility has reached an 18-month high, remaining significantly above historical averages. Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, expressed a desire for reduced volatility while recognizing the prevailing disinflation and slowing growth themes that might eventually lower long-term yields.

LeBas remains more confident in his intermediate-term projections of lower yields compared to short-term trends influenced by excessive positioning.

Inflation expectations, driven by tariffs, are at levels not seen in over 40 years, complicating Fed decision-making. Some officials suggest a monetary policy pause until clarity improves.

Interest rate futures now indicate three Fed rate cuts this year, compared to one or two previously suggested. However, bond market strategists are cautious, with 60% of respondents forecasting upward risks for the U.S. 10-year yield.

Robert Tipp, chief investment strategist at PGIM Fixed Income, suggests that tariffs will likely increase inflation, making the Fed hesitant to lower rates. He warned that slower growth could exacerbate fiscal issues and lead to more flexible budgeting policies, adding upward pressure to rates.