By Serafino Tobia, Director of Agency CMBS Trading and Portfolio, Greystone
US Treasuries
10-year Treasuries are at 4.10% as of this morning, 10 basis points lower since last Monday morning, but trading back higher this morning (4% as of the close on Friday). Yields dropped sharply last Wednesday afternoon, right after President Trump revealed a chart detailing country-specific reciprocal tariffs. President Trump announced a 10% minimum tariff on all imports and higher tariffs on dozens of countries. Equity markets plummeted around the world; the S&P 500 was lower by over 10.5% Thursday and Friday (the worst drop in the stock market since the COVID-19 pandemic in 2020). Stocks are opening up about +2% better this morning. Bond yields rallied as investors sought safe-haven assets, assessing the impact of the tariffs on the economy and the likelihood of the tariffs staying in place. At one point on Friday morning, after China announced a 34% retaliatory tariff on US products, 10-year Treasuries gapped down to 3.87%.
Last Week’s Economic Data
The economic data last week was mixed. Manufacturing and services data were weaker; however, the labor data was healthy. As you know, the data last week was just a sideshow to the tariff announcements.
- ISM Manufacturing PMI printed at 49, down 1.3 points from last month.
- JOLTS Job Openings printed for March at 7.568 million, down from last month at 7.762 million as revised.
- ADP Report – March’s private payroll increased by 155,000 jobs, above the pre-announcement economists’ consensus estimate of +120k and higher than last month’s +84k job growth, as revised.
- ISM Services Index – March’s print came in 2.7 points lower at 50.8 (versus 53.5 for February).
- Weekly Initial Jobless Claims – On Thursday, Initial Jobless Claims were lower than expected at 219,000 less than the prior week’s print at 225k, as revised.
- US Employment Report – On Friday, the March non-farm payroll printed a healthy +228,000 new jobs, versus Wall Street’s estimate at +140k. February’s print was revised lower to +117k, originally reported at +151k. The unemployment rate ticked up to 4.2%, 0.1% higher than last month.
Fed Monetary Policy – On Hold
The overnight Fed Funds rate has been at 4.33% (4.25% to 4.50% target range), unchanged since December. With the rally in yields across the entire yield curve this past week, the bond market now implies a 45% probability that the Fed will be moving the Fed Funds rate 0.25% lower at the FOMC meeting on May 7th and then another 1% in rate cuts (an additional four 0.25% cuts) before year-end.
It’s not clear to me that the Fed will cut 4-5 times (or at all) until we get some hard evidence that the economy and employment are weakening substantively. However, weakness in the economy can emerge swiftly. Most consumer and business surveys ("soft data") point towards a weakening economy. DOGE job cuts will likely be showing up in the hard data shortly, and we should anticipate effects of the tariffs on economic activity. In remarks on Friday, Fed Chairman Powell indicated hesitancy to lower interest rates, noting that the hard data on the economy and employment remains solid. Powell also expressed concern that tariff-related inflation could be more persistent. In other words, the Fed intends to continue monitoring the data while acknowledging that the President's fiscal and tariff policies have heightened the uncertainty regarding the trajectories of both inflation and employment.
My Take on Longer Term Yields
Last week, the yield on 10-year bonds fell below 4% as investors sought the safety of Treasuries amid a sharp decline in the stock market. The improved bond yields also indicate that investors are anticipating an economic slowdown due to the Trump reciprocal tariffs and retaliatory measures from our trading partners.
10-year yields were already moving towards 4% even before the reciprocal tariff policy was announced last Wednesday; Trump’s tariffs just pushed rates lower more quickly. The 10-year yield had already improved some 73 basis points since mid-January (4.79% 1/14/25) based on an expectation that the economy will turn negative reflecting weaker consumer and business sentiment (soft data, such as the U Mich consumer sentiment, purchasing managers’ indices, etc.). However, at this point, the hard data (employment, retail sales, productivity) has yet to show weakness. With the economic and the geopolitical uncertainties created by the Trump tariff policies, weaker hard data is likely just in front of us, which will confirm the 4% 10-year yield and likely gets the Fed off the sidelines.
We need to see how the trade/tariff issues develop. The political fallout from the downturn in the equity markets has been severe; Trump may well look for graceful ways to pivot. In the short term, if tariffs are scaled back significantly, equities will rally, and bond yields move higher again towards 4.25%. Alternatively, Trump may well stand his ground and wait out concessions from our trading partners, therefore, resolving the tariff conflicts could take six months or longer. With a sustained trade war, we can get to a 3.75% 10-year yield relatively quickly (along with a further trade-off in stocks and a slower economy).
Upcoming Economic Calendar
The highlight of the economic data this week will be March’s consumer price index (CPI) on Thursday and producer price index (PPI) on Friday. The key data point will be Core CPI (without the more volatile food and energy prices). For Core CPI, the market is expecting +0.3% for the month (versus 0.2% prior print). Headline CPI is forecasted at just +0.1% month-over-month with a sharp decline in gasoline prices last month. We will also see the University of Michigan Consumer Sentiment on Friday. Recall, U Mich Consumer Sentiment printed lower in March at 57, a 7.7 point drop from February (64.7). The last U Mich survey also showed that consumer inflation expectations were highly elevated - 1-year inflation expectations printed 5% and 5-10-year inflation expectations 4.1%. On Wednesday afternoon, we will also get the minutes to the Fed’s last FOMC meeting (3/19).
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