Investors turned to U.S. government bonds on Thursday as expectations for American economic growth continued to decline, weighing on stocks. The bond rally helped avoid a third consecutive daily loss, even as 10- and 30-year yields reached their highest levels so far this month.
Bonds Offer Stability Amid Market Volatility
Despite U.S. economic data showing slower inflation, bond investors largely dismissed it as a temporary trend, attributing broader economic risks to the Trump administration’s trade policies.
“Treasuries have done a nice job buffering against drawdowns in equities,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle Investments. “That’s a really good sign for investors. It’s a sign diversifying out of stocks to Treasuries is still working. That’s a big deal.”
Trade War Fuels Growth Concerns
As the U.S. trade war unfolds, its potential impact on economic growth has driven equity benchmarks to six-month lows, increasing demand for bonds. On Thursday, economists at Barclays Plc revised their U.S. GDP growth forecast downward and now predict two Federal Reserve interest-rate cuts this year, compared to one previously. They also warned that tariffs could contribute to inflation.
U.S. Treasury yields declined in the early New York afternoon session, with the 10-year yield settling at 4.27% after briefly touching 4.35%.
Inflation and Fed Policy in Focus
Earlier Thursday, Treasury yields initially failed to react positively to data showing that U.S. wholesale inflation remained unchanged in February, with the producer price index flat compared to January and up 3.2% year-over-year.
“The ongoing tariff threats are stoking concerns about future inflation and renewed potential for higher policy rates for longer,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights. “It will all come down to either affirmation of a slowing economy or data to the contrary to determine if the 10-year yield breaks sustainably below 4.25% — or if the new range is about 4.25% to 4.75% for now.”
Rate Cut Expectations and Market Adjustments
Swaps traders now anticipate the Federal Reserve will lower interest rates by approximately 66 basis points this year, suggesting at least two quarter-point cuts, with the first expected by July.
The market’s recovery reduced the expected yield for a 30-year Treasury bond auction held at 1 p.m. in New York. Despite tepid demand for the auction, yields continued to fall alongside equity benchmarks.
