Wall Street's Unusual Market Movements: Bond Yields Soar Amid Recession Fears

Wall Street is abuzz, but surprisingly, it’s not the plunging stock market grabbing all the attention; it’s the bond market that’s making waves. The dramatic price drops and surging yields are confounding investors, especially given the rising recession anxieties when bonds are typically a refuge. The 10-year Treasury yield leaped 19 basis points to 4.45%, even briefly surpassing 4.5% overnight. This rebound exceeds where it stood before President Donald Trump’s tariff plans were revealed last Wednesday, marking its highest level since February. Meanwhile, the 2-year Treasury yield edged up by 2 points to 3.76%. To clarify, one basis point equals 0.01%. Remember, yields and prices have an inverse relationship.

Overnight, Trump’s latest round of tariffs, including a cumulative rate of 104% on Chinese imports, went into effect. China swiftly retaliated on Wednesday, escalating global trade tensions. As Trump engages in this trade battle, stock prices have nosedived, with the S&P 500 shedding 12% in just four sessions amid mounting recession fears. Ordinarily, such market sell-offs and deepening concerns about an economic downturn would see investors flocking to bonds for safety, pushing yields down. Yet, the opposite is happening. The iShares 20+ Year Treasury Bond ETF (TLT), representing long-term bond prices, has plummeted 5% this week. “Perhaps even more alarmingly, U.S. Treasury markets are also experiencing an incredibly aggressive selloff as we go to press, adding to the evidence that they’re losing their traditional haven status,” Henry Allen, vice president and macro-strategist at Deutsche Bank, highlighted in a note.

Traders are exploring various explanations for this trend, ranging from hedge funds being forced to sell due to margin calls to more concerning possibilities of foreign investors offloading U.S. government bonds. A 10-year bond auction is set for later Wednesday, where the Treasury aims to sell $39 billion, following a weakly received 3-year Treasury note auction on Tuesday. The top holders of Treasuries—and potential bidders at these auctions—are Japan, China, and the U.K., nations that have been hit with significant tariffs. “This is a trade war and if countries can use their stock of U.S. financial assets that they’ve accumulated… then they can create some problems,” stated David Zervos, chief market strategist for Jefferies, during an appearance on CNBC’s “Worldwide Exchange.”

The rise in yields presents challenges for both the Trump administration and the Federal Reserve. The White House might have briefly found comfort in the idea that the disruptive tariff rollout was at least easing rates, offering consumers some relief. However, this week’s rebound in rates changed the narrative. “Trump administration officials have been taking credit for the recent drop in bond yields and mortgage interest rates,” Ed Yardeni of Yardeni Research penned in a note on Tuesday evening. “Unfortunately, the 10-year Treasury bond yield is up.” Yardeni speculated, “Why is this happening? Fixed-income investors may be starting to worry that the Chinese and other foreigners might start selling their US Treasuries.”

Meanwhile, the Fed might hesitate to reduce rates amidst tariff-induced inflation globally. Yet, if yields keep climbing and recession worries deepen, they may have no choice but to act. Still, while a rate cut might influence short-term rates, it risks triggering a larger spike in long-term rates, as traders gamble that a more lenient Fed could drive inflation higher in the long run.