Will Resetting Bring a Recession? U.S. Treasuries Become a Safe Haven

The Nasdaq experienced a sharp decline overnight, having dropped nearly 10% since the beginning of the year, and approximately 3,000 points from its peak after Trump's victory, a decrease of about 15%. The market is in turmoil, and recent statements from Trump and Bessent regarding the U.S. economy have led investors to believe that the slowdown in the U.S. economy is a necessary step to rebuild fiscal order, which also means that the focus of Trump's policies is currently on strict control of the fiscal deficit.

Concerns about a recession brought on by resetting are therefore intensifying. Funds are fleeing the stock market and flowing into the bond market, which is currently the key performance indicator (KPI) most concerning to the Trump administration. Whether it is an economic slowdown or recession, or a significant contraction of the fiscal deficit, these factors seem to make U.S. Treasuries the most attractive investment target.

Recently, the decline in short-term U.S. Treasury yields has accelerated, and the bond market has shown a "Bull Steepening" trend, indicating that funds are increasingly chasing the seemingly higher safety margins of short-term bonds, while also suggesting that there are still concerns about long-term inflation in the market.

Looking ahead, the market will continue to grapple with how Trump's new policies will unfold, while also questioning whether Bessent's advocated deficit reduction can truly be achieved. If the fiscal deficit is significantly compressed, and the U.S. is about to reach a mineral agreement with Ukraine, then the narrative around inflation and interest rates will inevitably change.

From the market's feedback, a seesaw effect has re-emerged between U.S. Treasury yields and U.S. stocks, but after the 10-year Treasury yield exceeds 4.6%, U.S. stocks have seen significant adjustments over the past two years. Past experience also indicates that when U.S. stocks undergo substantial adjustments, the main upward wave of U.S. Treasuries often just begins.

At present, Trump's policy focus is shifting back to domestic issues in the U.S. This seems to imply that curbing inflation is one of the ultimate goals of all policies. The inflation data for February, which will be released tomorrow night, will hint at the length of this market adjustment. If inflation remains high, confidence in the stock market may be further impacted.

At next week's Federal Reserve meeting, Powell will also face significant challenges. He will certainly state that there is still a need to evaluate Trump's policies, but the volatility in the stock market will make it difficult for him to adopt an overly hawkish stance.

The Nasdaq experienced a sharp decline overnight, having dropped nearly 10% since the beginning of the year, and approximately 3,000 points from its peak after Trump's victory, a decrease of about 15%. The market is in turmoil, and recent statements from Trump and Bessent regarding the U.S. economy have led investors to believe that the slowdown in the U.S. economy is a necessary step to rebuild fiscal order, which also means that the focus of Trump's policies is currently on strict control of the fiscal deficit The concerns about recession brought about by the reset are intensifying. Funds are fleeing the stock market and flowing into the bond market, which is currently the key performance indicator (KPI) most concerning to the Trump administration. Whether it is economic slowdown, recession, or a significant contraction in fiscal deficits, these factors seem to make U.S. Treasuries the most attractive investment target.

Recently, the decline in short-term U.S. Treasury yields has been faster, and the bond market has shown a "Bull Steepening" trend, indicating that funds are increasingly chasing the seemingly higher safety margins of short-term bonds. From another perspective, it also suggests that there are still certain concerns in the market regarding long-term inflation.

Of course, the decline in short-term bond yields has its limits. The market currently prices in about four rate cuts by the end of 2026, which is roughly in line with the most optimistic analyst expectations. From this perspective, the short-term target for the 2-year U.S. Treasury yield is around 3.5%. Once it approaches this level, and if the stock market still shows no improvement, the market may be forced to chase long-term bonds. Considering that the 30-year Treasury still has a certain positive carry, its trading value is beginning to stand out.

Looking ahead, the market will still be entangled in how Trump’s new policies will unfold, while also questioning whether the deficit reduction touted by Bessent can truly be realized. If the fiscal deficit is significantly compressed, and the U.S. is about to reach a mineral agreement with Ukraine, then the narrative around inflation and interest rates will inevitably change. Considering the tax cuts that will begin again in the second half of the year, the time left for Bessent to address the fiscal deficit will be very limited. However, even if the painful period is not long, stock investors have already begun to endure the pain.

From the market's feedback, a seesaw effect has re-emerged between U.S. Treasury yields and U.S. stocks. However, after the 10-year Treasury yield exceeded 4.6%, U.S. stocks have experienced significant adjustments over the past two years. Past experience also indicates that when U.S. stocks undergo substantial adjustments, the main upward wave of U.S. Treasuries often just begins.

Of course, previous experiences also show that the adjustment period for U.S. stocks is often short, meaning that after a brief adjustment, it is often easy to see a bull market in both stocks and bonds. Whether such a scenario will reappear in the future is uncertain, as Trump’s policies do not seem to follow previous simulations.

![](https://mmbiz-qpic.wscn.net/mmbiz_png/ypBpySdHOojv3I7X6U4EibBIibcCCroibSCIvPEmL1HggHlglf1Evd6M6VN0ic6gwqS34DApia63LFkhLByzicbs66iaw/640? Currently, Trump's policy focus is shifting back to domestic issues in the United States. This seems to imply that controlling inflation is one of the ultimate goals of all policies. The inflation data for February, which will be released tomorrow night, will hint at the length of the current market adjustment. If inflation remains high, confidence in the stock market may be further impacted.

At next week's Federal Reserve meeting, Powell will also face significant challenges. While he will certainly state that there is still a need to evaluate Trump's policies, the volatility in the stock market will make it difficult for him to adopt an overly hawkish stance. It is expected that Powell will continue to emphasize the resilience of the U.S. economy, but whether he explicitly states that there is "no rush to adjust interest rates" will depend on the performance of the U.S. stock market.

Authors of this article: Zhou Hao, Sun Yingchao, Source: GTJAI Macro Research, Original Title: "[Guotai Junan International Macro] Resetting Leads to Recession? U.S. Treasuries Become a Safe Haven"

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