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A shift towards safer investment options has led to a decline in yields on 10-year US Treasury bonds, falling below 4 percent. This marks the first occurrence since the election of Donald Trump last year, as investors seek refuge amidst market instability prompted by increased tariffs enacted by the US president.
On Friday, the yields on 10-year US Treasury notes dropped by over 0.36 percentage points to 3.88 percent, following a surge in bond prices. This movement positions them for their most significant weekly performance since August. Treasury bonds have prospered despite a sell-off in US equities and the US dollar, both of which experienced their worst day in recent years on Thursday. Their gains have surpassed those observed in other traditional safe assets, such as German government bonds and gold, throughout the week.
Investors are gravitating toward US debt with the anticipation that the tariffs may edge the US economy closer to a recession. Fund managers suggest that this behavior signifies a return to conventional trends where significant declines in equity markets prompt a shift to the security of government bonds.
Nicolas Trindade, a senior portfolio manager at Axa Investment Managers, observed that US Treasury yields have decreased sharply as investors move away from riskier assets towards safe havens, anticipating interest rate cuts by the Federal Reserve to prevent a recession. He noted that this situation contrasts with 2022 when both risk assets and government bonds experienced declines.
The allure of Treasuries as a secure option remains strong even amidst a sell-off incited by disruptions in the global trade environment instigated by Trump, which has disproportionately impacted US assets. Fraser Lundie, head of fixed income at Aviva Investors, remarked that the resurgence of a negative correlation between government bonds and riskier assets is a positive sign, emphasizing that such correlations have been infrequent recently. The drop in 10-year Treasury yields below 4 percent emphasizes this shift.
In parallel, other traditional safe assets have experienced gains, with German 10-year yields decreasing by 0.23 percentage points over the week. Japanese bonds have seen even more significant rallies, with 10-year yields dropping by 0.38 percentage points. Although gold reached several record highs ahead of Trump’s tariff announcements, it has slightly retracted since then.
US long-term borrowing rates, which determine a global risk-free rate and represent the baseline for debt costs across the US, are closely monitored by the administration. Treasury Secretary Scott Bessent has expressed particular interest in the 10-year yield. Its recent increase has prompted concerns regarding the sustainability of US debt amid a substantial fiscal deficit. Moreover, there has been speculation about potential US government intervention in the Treasuries market as part of a so-called Mar-a-Lago accord to weaken the dollar; however, the administration has indicated that such an accord is not currently under consideration.
Recently, it is the less favorable economic outlook that has been instrumental in lowering Treasury yields and the dollar’s value.
