U.S. Treasury yields plummet below 4.3%, is the U.S. facing a "recession-style rate cut"?

A series of recent weak data suggests that the U.S. economy may be falling into the abyss of recession, or may force the Federal Reserve to cut interest rates in an environment of "stagflation." Coupled with market concerns over Trump's policies, U.S. Treasury yields fell to their lowest level of the year on Tuesday.

On Tuesday, U.S. Treasury yields declined across the board, with the 10-year Treasury yield dropping more than 10 basis points in the closing hours to around 4.29%, significantly lower than Monday's 4.39%, and returning to levels seen in mid-December last year. According to FactSet data, this yield is also below the 50-day moving average and is approaching the 200-day moving average.

Swap contracts indicate that traders expect the Federal Reserve to cut rates by 56 basis points by the end of the year.

Ian Lyngen, head of U.S. interest rate strategy at BMO Capital Markets, stated in a report:

Due to ongoing concerns about the impact of President Trump's agenda on global economic performance, the market has exhibited risk-averse sentiment.

Weak Economic Data, Stubborn Inflation, Renewed Concerns of "Stagflation"

Recent economic data shows that the U.S. economy is facing dual pressures from inflation and borrowing costs.

On Tuesday, the Conference Board's consumer confidence index unexpectedly fell, reaching its lowest level since June of last year. Additionally, Citigroup's economic surprise index also dropped to its lowest point since September of last year, indicating that economic data continues to fall short of expectations.

These data have intensified market concerns about a slowdown in the U.S. economy, leading to a significant drop in Treasury yields. Elias Haddad, a senior market strategist at Brown Brothers Harriman, commented:

Danger signals for the U.S. economy are emerging. If U.S. economic data continues to perform poorly for another month or two, the narrative of American exceptionalism will be undermined.

Earlier, Bank of America research pointed out that the U.S. economy is currently in a mild state of "stagflation." In terms of inflation levels, despite multiple rate hikes by the Federal Reserve since the end of 2021, inflation remains stubbornly above the 2% target. Recent data shows that U.S. residents' inflation expectations for the coming years have risen to over 3%, while the 5-year breakeven inflation rate has also climbed to a two-year high of 2.61%.

In this context, market expectations for Federal Reserve rate cuts have rapidly intensified, with swap contracts indicating that traders expect a 56 basis point cut by the end of the year.

Uncertainty of Trump's Policies

The uncertainty surrounding Trump's administration's policies is also a significant factor driving down Treasury yields. The market is concerned that Trump's tariff threats and the Department of Efficiency's (DOGE) plans to cut federal wages will have negative impacts on the U.S. and global economy Although the amount cut from DOGE is not large, layoffs in government departments may impact the job market. Brij Khurana, portfolio manager at Wellington Management, noted that since 2022, job growth in government, healthcare, and education sectors has accounted for half of overall job growth, and these sectors may be affected by DOGE policies.

Bloomberg strategist Mark Cudmore stated:

The rhetoric changed on Monday from "the new U.S. government has not yet delivered on our expectations for economic growth" to "U.S. policies may begin to cause real damage to the economy"... This is why the yield on the 10-year U.S. Treasury is at its lowest level in over two months and may drop significantly again in the coming weeks.

U.S. Treasury Secretary Basant stated on Tuesday that with the implementation of Trump’s policies, the yield on the 10-year U.S. Treasury "should naturally decline." He also mentioned that both he and Trump are committed to "enhancing the attractiveness of U.S. Treasuries." Options trading on U.S. Treasuries indicates that investors expect the yield on the 10-year U.S. Treasury to further drop to around 4.15%.

Meanwhile, the previous decline in yields has led to stronger demand for U.S. Treasuries. This week's U.S. Treasury auctions attracted a large number of buyers, especially the results of the 5-year U.S. Treasury auction showed demand far exceeded expectations.

Not just the bond market, U.S. stocks are also worried about economic recession

Concerns about the U.S. economic outlook are reflected not only in the bond market but also in the performance of U.S. stocks.

The S&P 500 index has continued to decline since reaching a record high last week, and Walmart's profit warning has further intensified market worries. The fiscal policies of the Trump administration have also failed to provide sufficient support, leading to a gradual weakening of market expectations for economic growth.

The question is whether the current panic over economic growth is different from last summer. At that time, most U.S. Treasury benchmark rates fell below 4%, but "due to the excessive fiscal stimulus measures at that time, this panic dissipated very quickly," Khurana stated