By Sam Goldfarb

The Trump administration wanted bond yields to fall. They just didn't want it to happen like this.

Treasury yields, which fall when bond prices rise, have plunged over the past two days, reflecting deepening concerns that President Trump's tariff policies could cause significant damage to what has been a strong U.S. economy.

The yield on the benchmark 10-year U.S. Treasury note settled Friday at 3.992% , according to Tradeweb. That was down from around 4.8% in January, before tariff threats started weighing on investor sentiment, and roughly 4.2% on Wednesday, just ahead of Trump's "Liberation Day" tariff announcement.

Trump's unprecedented challenge to global trade has drawn stocks closer to a bear market and weighed heavily on the price of oil and other commodities.

Investors, meanwhile, have flocked to bonds for the same reasons they often do during times of economic anxiety: They are safe and benefit when the Federal Reserve cuts interest rates (because that makes their own higher rates more appealing).

In recent months, Treasury Secretary Scott Bessent in particular has outlined the importance of bringing down Treasury yields, reasoning that doing so would lower not only the U.S. government's borrowing costs, but also those of businesses and consumers. That is because Treasury yields set a floor on interest rates on everything from corporate bonds to mortgages.

Bessent, of course, didn't intend to reach this goal by sending the stock market into a tailspin. Instead, the Trump administration figured bond yields would decline as the government reduced its budget deficit, limiting the supply of new bonds entering the market. Increasing domestic oil and gas production would also help by pulling down energy prices and, more generally, inflation, Bessent has said.

That is hardly what's happening now. This week's bond rally, in fact, has been particularly noteworthy because it has happened even though investors are worried that Trump's policies could lead to higher inflation and a larger budget deficit.

For weeks, many investors have been hesitant to buy Treasurys because they believed Fed policymakers would remain cautious about cutting rates, with inflation above their 2% target. Tariffs present a conundrum for the central bank, with analysts expecting them to push up inflation in the short-term but also curb growth should consumers balk at buying more expensive products.

Investors also have speculated that a tariff-driven slowdown would compel Republicans in Congress to pursue a larger package of tax cuts, leading to more government borrowing and higher yields.

For now, those concerns have been brushed aside as many investors focus almost entirely on the threat of a stumbling economy and the prospect for rate cuts.

"I think the Fed won't be early, but I think they will be aggressive when they go, and in fact the later they are, the more they have to go," said Priya Misra, a fixed-income portfolio manager at J.P. Morgan Asset Management.

Similarly, Misra said, it might be appropriate to re-evaluate "once policymakers panic" and embrace a larger fiscal stimulus. But that is a concern for later, as the market remains in its own panic mode.

Regardless of what is causing bond yields to fall, the move may still be welcomed by some people, such as those looking to buy a home and others aiming to refinance into lower-rate mortgages.

A refinancing boom could lower the burden of homeownership, particularly for people who bought in the past few years. It would also be a boon to the mortgage industry, which has faced years of lackluster demand.

Administration officials themselves have tried to seize on the bond market as a bright spot amid the general market chaos.

"Yields are going down today," White House trade adviser Peter Navarro said in a CNBC interview Thursday. "What does that mean? Mortgage rates are going to come down. That is going to have a nice bounce for our housing sector."

Some investors are still hesitant to fully embrace the bond rally.

The current economic threat "is completely made by policy," said Leah Traub, a fixed-income portfolio manager at Lord Abbett. Therefore, she said, it can at least be "mitigated by policy," too. Bond yields could recover as quickly as they dropped.

Some analysts have noted parallels between Trump's current tariff push and the effort by the U.K.'s prime minister in 2022, Liz Truss, to pass big tax cuts at a time of acute inflation anxieties. In that case, a sharply negative market reaction caused Truss to backtrack from her policies. One difference in that situation, though, is that U.K. bonds were also selling off, causing a surge in borrowing costs.

Even if tariffs aren't rolled back, Traub said she isn't convinced that the Fed could just ignore high inflation and focus only on boosting growth if that becomes an issue.

"The Fed isn't going to be able to react super forcefully to this, and I don't think they should because the inflation impacts are uncertain at this point and especially the impact on inflation expectations -- the last thing the Fed wants to do is lose credibility on that," she said.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

April 04, 2025 15:37 ET (19:37 GMT)

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