- Bond yields surged as President Donald Trump entered the Oval Office amid fears his economic agenda would prove inflationary. This week, however, investors grappled with softer economic data and considered how Trump’s tariff threats could slow growth, which might give the Federal Reserve room to cut rates.
President Donald Trump has made it clear he wants to lower borrowing costs for Americans. Initially, that commentary included plenty of pressure on the Federal Reserve to cut interest rates, but Trump and Treasury Secretary Scott Bessent have seemingly turned their attention to the 10-year Treasury, the benchmark for mortgages and other common types of loans throughout the economy. The yield, or annual return, on the 10-year did finally decline in February—but maybe not for the reason the President wants.
Stocks have dipped this week as investors grapple with softer economic data and consider how Trump’s tariff threats and layoffs of government workers could slow growth. Bond prices have an inverse relationship with yields, which fall as demand for safe-haven assets like Treasuries rises—and lower yields allow rates across the economy to fall. As the S&P 500 dropped almost 3% this month, bonds have nearly reversed the effects of a sell-off that caused the 10-year yield to briefly surge past the 4.8% mark in January, its highest level since November 2023.
On Friday, rates dipped below 4.25% as markets around the world reckoned with the possibility of a global trade war. Portfolio managers and fixed-income experts told Fortune that the rally in bonds reflects expectations that signs of weakness and lower inflation will give the Fed room to slash rates.
“It’s always going to be very dependent upon what the economy does,” said Scott DiMaggio, head of fixed income at AllianceBernstein, “now more than ever.”
On Friday, the market breathed easier after the Fed’s preferred inflation metric fell slightly from the previous month as expected. But investors are also wary that Americans are slowing their spending, with the Atlanta Fed’s weekly GDP growth estimate coming in at -1.5%, a 3.8% drop from last week.
“It looks like the economy is headed into recession,” said Jay Hatfield, the CEO of Infrastructure Capital Advisors, who believes the Fed has been keeping monetary policy overly tight.
Jason Bloom, head of fixed income ETF strategy at Invesco, didn’t go quite as far, but he said that uncertainty about the new administration’s policy has put a pause on economic activity. DiMaggio noted the Atlanta “GDPNow” number is jumpy but said it jibes with other indicators that growth is moderating.
“The consumer is getting a little tired,” he said.
Before Trump took office, many feared the President-elect’s policies on tariffs, tax cuts, and mass deportations could prove inflationary and force the Fed to keep rates elevated. But after Trump doubled down on taxing imports from China and said blanket tariffs on Canada and Mexico would also go ahead next week, investors are seemingly remembering what happened during his first term.
“When we imposed those first tariffs on China back in 2018,” Bloom said, “it wasn’t very inflationary, but growth definitely slowed.”
Bloom also believes that traders are taking a leap of faith as they push the 10-year lower. The market may be optimistic about rate cuts again, he said, but consumer expectations of inflation have recently surged, which can make it much harder for the Fed to fight rising prices.
“I think it’s more likely we’re at the bottom of the range for 10-year yields at four and a quarter,” he said.
That’s presumably not what the new administration is hoping for. Then again, it probably doesn’t want an economic slowdown on its hands either.
