US Treasuries rally as recession angst sends investors fleeing to safe havens

NEW YORK – US Treasuries surged and investors boosted their bets on Federal Reserve interest rate cuts as fear of an economic slowdown took hold across US markets.

The bond rally on March 10 sent yields on the benchmark 10-year notes down as much as 10 basis points to 4.2 per cent as US stocks posted their worst day of the year.

The flight to safety came as traders also ramped up their expectations for Fed rate reductions in 2025, pricing in nearly 79 basis points of easing and a greater chance the next move comes in May.

“Growth risk – all else equal – seems to be tilted to the downside,” said portfolio manager at Capital Group Chitrang Purani. “Taking a little bit of duration in fixed income markets – particularly in the intermediate parts of the curve – that are  more sensitive to growth and the path of Fed policy makes a lot of sense.”

The bond market moves were in sharp contrast with those in US equities. The Nasdaq 100 had its worst day since 2022 as traders grew more concerned about the health of the US economy after US President Donale Trump said it is facing “a period of transition.”

Yields on two- through 10-year notes all fell at least 10 basis points during intraday trading, and traders increased their wagers on a Fed cut in May to 48 per cent – from about 40 per cent at the close last week.

In options markets, traders were hedging in case the Fed amps up the pace of easing in 2025.

For now, though, the US central bank is widely expected to keep rates steady at its March meeting, as it did in January. The next rate cut is not fully priced in until June. 

Over the weekend, Mr Trump – who was asked whether he is expecting a recession in 2025 – said: “I hate to predict things like that. There is a period of transition, because what we’re doing is very big.”

That followed Treasury Secretary Scott Bessent’s remarks on March 7 that there could be “a detox period” as the US reduces spending. 

Investors are therefore growing more worried that US leaders will keep pushing their agenda even if growth takes a hit and markets tumble.

The consumer price index report for February will be released on March 12, and is expected to show a year-on-year increase of 2.9 per cent, down from 3 per cent in January.

The February producer price index will be reported the following day.

Mr Anshul Pradhan, head of US rates strategy at Barclays, and his colleagues told clients in a note on March 7 that the “markets are still understating the risk that well below trend potential growth will require a Fed response, even if lagged”.

They recommended investors move existing long positions in two-year notes into Treasuries that mature in five years.

Not everyone sees the economy poised for trouble. Strategists at BNP Paribas say US growth concerns are overblown and warn that the degree of Fed rate cuts priced in now could moderate.

The firm expects long-term Treasuries to be supported by the prospects that Mr Bessent could keep note and bonds sales steady through 2027.

In February, Mr Bessent said any move by his debt management team to boost the share of longer-term Treasuries in government debt issuance is some ways off.

Many Wall Street dealers have predicted such increases would come sometime later this year.

“There’s clearly less of a fiscal impulse making its way through the US economy,” Mr Steve Boothe, portfolio manager and head of investment grade at T. Rowe Price, said. “It was bound to decelerate cyclically anyway, but that’s being accelerated with some of the spending and job cuts that you’re seeing at the federal level.”

For Mr Booth, the job market is likely to weaken further in March, leading to increased wagers on a Fed cut in May.

That could spark 10-year yields to move closer to 4 per cent, he said.

He said the market foresees lower inflation, such as that “January inflation will be the cyclical high for the next couple of months to quarters”. BLOOMBERG