By Vivien Lou Chen
‘Worries continue to mount regarding the impact of President Trump’s agenda on the performance of the global economy,’ strategists at BMO Capital Markets say
U.S. government debt rallied aggressively overnight and into Tuesday’s trading session, pushing yields below key technical levels in a way that appeared to be shaking confidence in the broader market.
The 10-year yield, which falls when there’s buying demand for the underlying government note, broke below its 100-day moving average of 4.379% before continuing to drop, according to BMO Capital Markets strategists Vail Hartman and Ian Lyngen. The rate has dropped to as low as 4.283% and, according to FactSet data, is also below its 50-day moving average and headed for its 200-day moving average.
Helping to explain the aggressive bond-market rally unfolding on Tuesday is a somewhat different take on the risk-off narrative that played out over recent sessions. While Friday’s session was marked by concerns about the strength of the U.S. economy following a batch of weak data, Monday’s trading appeared to be dominated by worries about stagflation, or an unwelcome mix of stagnating growth and elevated inflation. Now these concerns are encompassing worries about the rest of the world, the potential for an economic contraction domestically, or both.
The thinking behind the fresh drop in Treasury yields marks a notable turnabout since two weeks ago, when a hotter-than-expected consumer-price index for January raised doubts about the Federal Reserve’s ability to keep cutting interest rates. Ordinarily, yields that rise too quickly can unnerve stock-market investors. But the same can also be said for yields that drop too fast.
As of Tuesday morning, flight-to-safety sentiment was sending 2-year BX:TMUBMUSD02Y and 10-year yields BX:TMUBMUSD10Y toward a fifth straight session of declines and pushing them to fresh 2025 lows. The 30-year yield BX:TMUBMUSD30Y was also falling for a fourth consecutive day.
Meanwhile, the S&P 500 SPX and Nasdaq Composite COMP indexes appeared to be headed for a fourth day of declines, while the Dow Jones Industrial Average DJIA was also down, as data showed that consumer confidence sank in February on worries about inflation and tariffs. Oil prices touched their lowest levels of the year.
The market moves came a day after President Donald Trump, speaking at a White House news conference with French President Emmanuel Macron, said “we’re on time with the tariffs” on Canada and Mexico, which are set to take effect next month.
See also: Trump’s trade war unleashed a wave of uncertainty among investors and business leaders. Why that’s a good thing.
“Worries continue to mount regarding the impact of President Trump’s agenda on the performance of the global economy,” said BMO’s Hartman and Lyngen.
They also pointed to recent data from the University of Michigan, which showed that more than half of respondents who were surveyed expected unemployment to rise in the year ahead. “Typically, when a majority of respondents are biased for higher unemployment, the economy is on the precipice of a sharper slowdown,” the strategists wrote in a note. “This is evidenced by the fact that every instance of a >50% print since 2000 falls within a quarter of a recession.”
Generally speaking, Treasury yields tend to rise or fall for a number of reasons, including the outlook on the U.S. economy and inflation, but these moves can occur for either good or bad reasons. At the moment, the thinking is centered on a slowdown of growth that may require the U.S. central bank to take action. Fed-funds futures traders have dropped the likelihood of no Fed rate action this year to just 4.4% as of Tuesday, down from 18.7% a week ago – meaning they’re now tilting toward a somewhat greater chance that officials will need to cut interest rates to support the economy.
As Phil Toews, chief executive and lead portfolio manager of Toews Corp. in New York, put it by phone: “Worries about a potential recession or contraction in economic growth are the only viable reason you’d see rates declining as they have today. It may be misguided because of all the inflationary pressures, but that’s probably what’s going on.”
The extent of the drop in yields seen on Tuesday “does not appear to be justified,” said Toews, whose firm manages just over $1 billion in assets. He added that he thinks it’s too early to tell if the U.S. is in a stagflationary environment.
-Vivien Lou Chen
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02-25-25 1152ET
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