FOR all the trepidation coursing through the bond market at the start of 2025, Treasuries are up on the month as traders remain on watch for how Donald Trump’s tariff and immigration policies will develop.
After a rollercoaster stretch, the Bloomberg US Treasury index is up about 0.6 per cent this month through Thursday (Jan 30) and benchmark yields are hovering near their lows for this year. A positive January return for the world’s biggest debt market seemed unlikely just weeks ago. Bonds slumped in December and in the first half of this month, partly on speculation that Trump’s proposals for steep tariffs would reignite inflation.
It took until Thursday for the president to indicate he’d follow through on some of his tariff threats, meaning investors who had been bracing for levies to be imposed on day one of his term had a couple weeks of relief. Treasuries also got a major boost mid-month from cooler-than-forecast inflation data, and then as Monday’s equities rout fuelled a surge in haven demand.
“The near-term and medium-term macro outlook is exceptionally murky given the lack of clarity around policy,” said Michael de Pass, global head of rates trading at Citadel Securities. “We are in a time of great uncertainty and likely high volatility, so markets are going to cover big and broad ranges.”
Trump on Thursday said he would impose 25 per cent tariffs on imports from Mexico and Canada on Feb 1, and the White House reiterated the plan on Friday, denying a report that there would be a delay until Mar 1. The plan also involves imposing 10 per cent tariffs against China.
Treasuries weakened modestly on Friday afternoon on the latest tariff news, with 10-year Treasury yields rising two basis points to 4.5 per cent. The rate is down from a more than one-year high of 4.8 per cent touched on Jan 14.
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Some investors said the market reaction was relatively muted as they were waiting to see if the tariff warnings were a negotiating tactic.
“The bond market is shrugging it off until implementation,” to see what it includes and more importantly how long it lasts, said George Catrambone, head of fixed income for the Americas at DWS Group.
The fixed income market faces some other big challenges in the weeks ahead. Data on jobs and inflation are looming that will help shape expectations for the Federal Reserve after policymakers paused their easing cycle this week and signalled they’re in no hurry to cut again.
On Friday an update on the Fed’s favoured inflation gauge, the personal consumption expenditures index, showed a 2.6 per cent increase in December from a year earlier, up from a 2.4 per cent pace the previous month – still firmly above the central bank’s 2 per cent inflation target.
Investors are also waiting for announcements on immigration, taxes and fiscal matters. Higher yields and potentially even a rate increase remain on the table if data strengthens on the back of pro-business polices from Trump. There’s also the worry that tariffs and an immigration crackdown may ultimately push up consumer prices and keep Fed rates elevated.
Fed bets
For now, traders still see the Fed’s next move as a cut, although likely not until mid-year. Morgan Stanley economists said they expect the central bank to lower rates in March, while acknowledging that there’s a higher bar for such a move after the Fed’s meeting this week.
Speaking on Friday, Fed governor Michelle Bowman said she wants to see additional progress on inflation before the central bank lowers rates further, and questioned how restrictive policy might be given the economy’s strength.
For Roger Hallam, global head of rates at Vanguard, a 10-year yield between 4.25 and 4.75 per cent “is a fair-value range as long as you can remain in what we’ll call a sort of soft landing-ish type environment”.
Still, he doesn’t rule out yields breaking higher “if you’re seeing more sustained upward pressure on inflation, either as a result of tariffs or immigration or if you see increased fiscal uncertainty driving term premium higher”.
At least some traders are hedging for that scenario. Flows in Treasury options on Thursday included demand for a position targeting an increase in the 10-year yield to around 4.85 per cent by Feb 21. The cash yield hasn’t been that high since late 2023.
Of course, the 4.8 per cent level is roughly where investors stepped in to buy in mid-January, kicking off the month-end rally.
That was also around when bond giant Pimco advocated owning five to 10-year Treasuries. They said that yields were “attractive” at a time when valuations in equities and credit markets were stretched.
The asset manager also pointed to the uncertainty that the president will likely inject into markets this year and diminished expectations for central bank easing. Against that backdrop of unpredictability, bonds will offer stability, economist Tiffany Wilding and Andrew Balls, chief investment officer for global fixed income, wrote in a note. BLOOMBERG
