US Treasuries become the "only safe haven", only "stagnant" in the current situation, not worried about "inflation"

Recently, the US Treasury market has experienced a significant decline in yields, forming the "bond market rebound" expected by the Trump administration. However, the driving force behind this rebound is not the fiscal improvements or inflation cooling envisaged in its policy blueprint, but the deep concerns about economic growth prospects triggered by its aggressive tariff policy. Against the backdrop of growing risk aversion in the global market, US Treasury bonds are playing the role of the "only safe haven" in the eyes of investors, and the focus of the market has temporarily shifted from inflation risk to the imminent risk of economic stagnation. "Unconventional" rebound under the shadow of tariffs The Trump administration, especially Treasury Secretary Steven Mnuchin, had explicitly expressed the policy intent to lower US bond yields in order to lower borrowing costs for the government, businesses, and consumers. Its presumed path depends on reducing the budget deficit to reduce bond supply, and suppressing inflation by increasing domestic energy production, thus guiding yields to naturally decline. But reality has unfolded differently. Data shows that the benchmark 10-year US Treasury bond yield has sharply declined in the past few days, closing at 3.992% on Friday. This level is not only significantly lower than around 4.8% when the tariff clouds appeared in January, but also substantially lower than around 4.2% on the Wednesday before Trump announced the latest tariffs. The direct cause driving the surge in bond prices and the decline in yields is the widespread concern in the market about the potentially severe damage to the US economy from Trump's tariff policies. This policy, which poses an unprecedented challenge to the global trade order, has pushed the US stock market to the edge of a bear market and inflicted heavy blows on prices of commodities like crude oil. In this scenario, investors are following their instincts for safe-haven assets and flocking to US Treasury bonds seen as secure assets. The focus of the market is currently only on "stagnation," with little attention paid to "inflation." It is worth noting that this round of bond market rebound occurred against a special backdrop: investors are also concerned that Trump's tariff policy could raise inflation in the short term and increase the budget deficit both of which theoretically are not favorable for bond prices. The market generally expects tariffs to raise prices in the short term, and if consumers reduce purchases due to price increases, it will further inhibit economic growth. At the same time, there are speculations in the market that the economic slowdown caused by tariffs may force Republican lawmakers in Congress to seek larger tax cuts, thereby increasing the government's future borrowing needs. However, the long-term concerns about inflation and the budget deficit have been overshadowed by the immediate fear of economic slowdown in the current market panic. Investors' attention is almost entirely focused on the direct threat of economic stagnation and the expectations of Fed rate cuts that may ensue. As Priya Misra, fixed income portfolio manager at JP Morgan Asset Management, analyzed: "I think the Fed won't preempt, but once they act, it will be aggressive... the longer they wait, the more they will have to do in the future." For the Fed, tariffs have created a tricky policy dilemma: how to deal with inflation pressures that exceed the 2% target, while also managing the downside risks to economic growth. But at least in the current market panic dominated by fear of stagnation, concerns about "stagnation" have temporarily overshadowed worries about "inflation." Low interest rates as a double-edged sword: potential benefits with lingering doubts Regardless of the driving factors, the decline in bond yields could indeed bring some positive effects. It directly lowers the benchmark rates for a range of credit products from corporate debt to mortgage loans, benefiting consumers planning to buy homes or seeking refinancing. White House trade advisor Peter Navarro also tried to seize on this point as a "bright spot" amid market turmoil, stating that the decline in yields will drive down mortgage rates, "bringing a nice rebound to our real estate industry." However, not all market participants are entirely optimistic about this policy-driven bond market rebound. Leah Traub, fixed income portfolio manager at Lord Abbett, warned that the current economic threats are "completely policy-driven" and could potentially be "relieved through policy changes" once the policy sentiment shifts or market sentiment stabilizes, the downward trend in bond yields could quickly reverse. Some analysts have compared the current situation to the market turmoil caused by then-UK Prime Minister Margaret Thatcher's push for large-scale tax cuts during a period of high inflation in 1982. But there is a crucial difference: at that time, British government bonds faced panic selling, leading to soaring borrowing costs; while currently, US Treasury bonds are being actively bought under the drive of safe-haven demand. Even so, Traub still doubts whether the Fed can completely ignore inflation and solely focus on stimulating growth when inflation is high. "The Fed cannot react too aggressively to this (slowdown), I don't think they should, she emphasized, because the impact of inflation is currently uncertain, especially on inflation expectations the last thing the Fed wants is to lose credibility on this front. This article is taken from "Wall Street News" and was written by Gao Zhimou; edited by Liu Jiayin.