U.S. Treasury Bonds: After this summer, the yield will trend downward
2025-04-28
■ Volatility in the U.S. Treasury market increased in April, and the term premium widened, leading to an increase in U.S. Treasury yields.
■ As the probability of a hard landing increases, the trend of economic slowdown is clear, and yields will fall after this summer.
The U.S. Treasury market continues to experience unstable price fluctuations, and the 20-day historical volatility (HV) of the U.S. 10-year Treasury yield has risen sharply since the announcement of "mutual tariffs" on April 2. Due to the United States' policy changes, policy predictability has significantly decreased, contributing to overseas investors' concerns about their holdings of U.S. Treasury bonds and the independence of the Federal Reserve (FRB). This has resulted in an increase in term premiums and an overall rise in long-term and ultra-long Treasury yields. I pointed out last month that in the process of promoting tax increases and tax cuts, the stability of U.S. long-term interest rates will become a barometer of trust in government policy operations, but it seems that the market's confidence in these operations has begun to waver.
The 10-year U.S. Treasury yield fell below 4% in the second week of April, as the U.S.-China confrontation intensified and stock prices plummeted. However, it failed to stabilize within the 3% range, which aligns closely with the Bank's forecast in March that "the 10-year U.S. Treasury yield will fluctuate within the 4% range until the impact on the economy and prices becomes clearer."*2 Considering the U.S. policy direction since the announcement of the "mutual tariffs" and their effect on the economy, it is expected that a clear trend in the 10-year U.S. Treasury yield will emerge after this summer, with the yield entering a downward channel as the Federal Reserve starts to cut interest rates. Since the implementation of country-specific tariffs includes a 90-day grace period, the impact of these tariffs on the economy and prices will be difficult to identify in economic indicators before June. Additionally, the surge in exports before the implementation of tariffs will further complicate the assessment of the economic tone. At the same time, expectations for tariff withdrawal are fading. Even if a significant tariff increase is avoided through trade negotiations, the revision of non-tariff barriers and the postponement or adjustment of corporate equipment investment and recruitment plans may still constrain economic activities in the medium term. The likelihood of the U.S. economy shifting from the originally anticipated mild deceleration (soft landing) to a sharp deceleration (hard landing) is increasing. Although the Federal Reserve places importance on the stability of medium- and long-term inflation expectations and is not rushing to cut interest rates, some officials, including Fed Governor Waller, have started to advocate that interest rate cuts could be considered, provided that the inflation caused by tariffs is regarded as a temporary phenomenon. It is expected that after this summer, as the trend of economic slowdown becomes more apparent, the necessity for a financial policy response will increase. Once interest rate cuts are initiated, they will likely progress to the neutral interest rate level faster than originally envisioned in the Summary of Economic Projections (SEP) released in March. The yield on the U.S. 10-year Treasury bond is anticipated to decline in tandem with the policy rate. However, due to the presence of the term premium, the decrease in yields will be relatively limited, and as interest rate cuts are implemented, the yield curve will steepen.
■ As the probability of a hard landing increases, the trend of economic slowdown is clear, and yields will fall after this summer.
The U.S. Treasury market continues to experience unstable price fluctuations, and the 20-day historical volatility (HV) of the U.S. 10-year Treasury yield has risen sharply since the announcement of "mutual tariffs" on April 2. Due to the United States' policy changes, policy predictability has significantly decreased, contributing to overseas investors' concerns about their holdings of U.S. Treasury bonds and the independence of the Federal Reserve (FRB). This has resulted in an increase in term premiums and an overall rise in long-term and ultra-long Treasury yields. I pointed out last month that in the process of promoting tax increases and tax cuts, the stability of U.S. long-term interest rates will become a barometer of trust in government policy operations, but it seems that the market's confidence in these operations has begun to waver.
The 10-year U.S. Treasury yield fell below 4% in the second week of April, as the U.S.-China confrontation intensified and stock prices plummeted. However, it failed to stabilize within the 3% range, which aligns closely with the Bank's forecast in March that "the 10-year U.S. Treasury yield will fluctuate within the 4% range until the impact on the economy and prices becomes clearer."*2 Considering the U.S. policy direction since the announcement of the "mutual tariffs" and their effect on the economy, it is expected that a clear trend in the 10-year U.S. Treasury yield will emerge after this summer, with the yield entering a downward channel as the Federal Reserve starts to cut interest rates. Since the implementation of country-specific tariffs includes a 90-day grace period, the impact of these tariffs on the economy and prices will be difficult to identify in economic indicators before June. Additionally, the surge in exports before the implementation of tariffs will further complicate the assessment of the economic tone. At the same time, expectations for tariff withdrawal are fading. Even if a significant tariff increase is avoided through trade negotiations, the revision of non-tariff barriers and the postponement or adjustment of corporate equipment investment and recruitment plans may still constrain economic activities in the medium term. The likelihood of the U.S. economy shifting from the originally anticipated mild deceleration (soft landing) to a sharp deceleration (hard landing) is increasing. Although the Federal Reserve places importance on the stability of medium- and long-term inflation expectations and is not rushing to cut interest rates, some officials, including Fed Governor Waller, have started to advocate that interest rate cuts could be considered, provided that the inflation caused by tariffs is regarded as a temporary phenomenon. It is expected that after this summer, as the trend of economic slowdown becomes more apparent, the necessity for a financial policy response will increase. Once interest rate cuts are initiated, they will likely progress to the neutral interest rate level faster than originally envisioned in the Summary of Economic Projections (SEP) released in March. The yield on the U.S. 10-year Treasury bond is anticipated to decline in tandem with the policy rate. However, due to the presence of the term premium, the decrease in yields will be relatively limited, and as interest rate cuts are implemented, the yield curve will steepen.