(Bloomberg) - From the Supreme Court’s decision against Donald Trump’s tariffs to the threat of Federal Reserve rate hikes and signs of labor-market resilience, a range of pressures are forcing a sentiment shift in the $31 trillion Treasury market back in favor of bears.
Treasuries fell last week for the first time in a month as a slate of negative drivers piled up. The US high court’s move to strike down Trump’s signature global tariffs threatens to remove, at least for now, a major source of government revenue used to finance the deficit. Meanwhile, jobs data and a higher-than-expected inflation reading suggest the bar is high for further Fed rate cuts in the coming months.
Some Fed officials even floated the idea of tightening policy if inflation remains stubbornly elevated, minutes of the January policy meeting showed.
All of these forces — along with Mideast tensions that pushed oil prices higher — delivered a windfall to investors who had bet against bonds as they rallied earlier this month.
“We are underweight US Treasuries and happy to run those positions,” said James Athey, a portfolio manager at Marlborough Investment Management.
Athey said he sold 10-year notes when yields dropped to a two-month low earlier last week near 4%, putting them on the brink of breaking below their well-established yield range. Yields ended the week at 4.08%, still down from about 4.3% in mid-January.
Treasuries’ advance earlier in the month flummoxed traders who had been wagering that Trump’s desire to run the economy hot heading to the mid-term election would keep the bond market under pressure.
Instead, US debt rose as fears around artificial intelligence’s disruptive power roiled equities and sparked haven buying. A spillover from a sharp rally in Japanese bonds and rising tensions in the Middle East added to the mix, driving returns on Treasuries up more than 1%, on the track for the best month since June.
At one point, traders were betting that there’s a 50% chance that the Fed will cut rates three times this year, up from less than two just a few weeks earlier.
But even as bonds climbed, there were signs that the gains was becoming stretched. In the options market, a measure of how much of a premium investors are willing to pay to hedge against further gains in the 10-year futures — known as one-month call-put skew — reached levels that in recent years signaled a rally was near its end.
It’s a pattern that played out last April when Trump’s tariff announcement roiled global markets, as well as a year earlier during the unwind of the so-called carry trade and during the regional banking crisis of 2023. In each case, extremes in options marked rally peaks, with yields rising in the weeks afterward.
To strategists at BNP Paribas, that’s a sign the “panic-driven” rally has gone too far, too fast. They recommended clients use interest-rate swaps to bet 10-year yields will rise. JPMorgan Chase & Co. has advised investors to go short two-year notes, arguing that a stable labor market and sturdy economic growth are likely to keep the Fed on hold throughout 2026.
“We don’t expect a breakout, but within these ranges, we are bearish,” said Jay Barry, head of global rates strategy at JPMorgan. “The data still looked good.”
To be sure, there is still plenty to sustain a bid for a Treasuries. The US military is stationing a vast array of forces in the Middle East, giving Trump the option of a major attack against Iran as he pressures the country to strike a deal over its nuclear program. While most markets — other than oil — have taken the moves in stride so far, any escalation could spark a risk-off rotation.
Elsewhere, Blue Owl Capital Inc.’s decision to restrict withdrawals from one of its private credit funds has also raised concerns about risks bubbling beneath the surface of the $1.8 trillion market.
As for tariffs, it’s a mixed message. The court’s decision – a well-expected outcome in prediction markets — could cut the US average effective tariff rate by more than half. That would means the Treasury would need to sell more debt to finance funding shortfall.
What Strategists Say ...
The US Supreme Court’s ruling against some of the tariffs imposed by President Donald Trump won’t be a major yield-curve driver, but a slight bear steepening isn’t a surprise as the Treasury market prices for incrementally worse deficits on a forward basis. Potential tariff repayments will initially come from the Treasury’s $890 billion cash balance, to be replenished over time through increased Treasury bill issuance, which the front end of the market should absorb smoothly.
—Ira Jersey and Will Hoffman, BI rates strategists.
But the justices didn’t address the extent to which importers are entitled to refunds, and Trump can lean on alternative legislation to try to rebuild his tariff wall. The president said Friday he planned to impose a flat 10% levy on foreign goods in the coming days — a figure he then raised to 15%, according to a social media post Saturday — and that he would order a raft of trade investigations that should allow him to enact more permanent tariffs.
So the knee-jerk market reaction – which drove 10-year yields up as much as 3 basis points Friday — could be short-lived.
“The initial reaction seemed too much to me, I don’t think many felt they would stay on,” said John Briggs, head of US rates strategy at Natixis. “And they didn’t rule on refunds, so I don’t see money going out the door.”
Briggs said he would wait for the 10-year yield to fall back to 4% before going short again.
His approach has been well-tested in recent months, with the 10-year largely trading in a range between about 4% and 4.3% since September. That reflects a stable economy that has left the market largely in balance.
The result is a tug of war between bears and bulls, keeping the bond market largely trendless, said Kathryn Kaminski, chief strategist and portfolio manager at AlphaSimplex Group.
“We need a strong shift in themes,” Kaminski said. “We haven’t seen that yet. It’s very much a back-and-forth market.”
For now, momentum is with the bears.
What to Watch
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Economic data:
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Feb. 23: Chicago Fed national activity index; factory orders durable goods (final); Dallas Fed manufacturing activity
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Feb. 24: ADP weekly employment change; Philadelphia Fed non-manufacturing activity; FHFA House Price Index; House Price Purchase Index; S&P Cotality CS 20-City Index; Richmond Fed manufacturing index and business conditions; Conference Board consumer confidence index; Wholesale inventory; Dallas Fed services activity
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Feb. 25: MBA mortgage applications
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Feb. 26: Initial jobless claims; Kansas City Fed manufacturing activity
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Feb. 27: PPI Final Demand; MNI Chicago PMI; construction spending; Kansas City Fed services activity
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Fed calendar:
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Feb. 23: Fed Governor Christopher Waller
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Feb. 24: Chicago Fed President Austan Goolsbee; Boston Fed President Susan Collins; Atlanta Fed President Raphael Bostic; Waller; Fed Governor Lisa Cook; Richmond Fed President Tom Barkin
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Feb. 25: Barkin; Kansas City Fed President Jeff Schmid; St. Louis Fed President Alberto Musalem
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Feb. 26: Fed Vice Chair for Supervision Michelle Bowman
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Auction calendar:
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Feb. 23: 13-, 26-week bills
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Feb. 24: 6-week bills; 2-year notes
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Feb. 25: 17-week bills; 2-year floating rate notes; 5-year notes
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Feb. 26: 4-, 8-week bills; 7-year Treasury notes
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By Ye Xie
With assistance from Michael MacKenzie, Elizabeth Stanton and Sujata Rao
