Treasuries rally as trade war fears smother solid jobs data

Traders boosted their bets on Federal Reserve interest-rate cuts this year and US Treasuries rallied as a solid report on American jobs failed to calm markets.

Yields on two-year notes traded near their lowest since September 2022 and benchmark 10-year yields were down 11 basis points to 3.92% following the jobs reading amid fallout from US President Donald Trump’s tariffs. Money markets fully priced four quarter-point rate reductions this year and the chance of a fifth — up from just three cuts seen before the levies were announced.

With global financial markets in a tailspin — and China announcing it would impose a 34% tariff on all imports from the US, spurring fears of a global trade war — bond investors now turn to a speech by Federal Reserve Chair Jerome Powell for clues on the state of the US economy and the path for easing. Markets are already fully pricing in a quarter-point move by June, with a chance of a larger reduction. 

“The bond market is seeming to keep its focus on the tariff news,” said Zachary Griffiths, head of investment-grade and macroeconomic strategy at CreditSights. 

Nonfarm payrolls increased 228,000 last month compared to a Bloomberg consensus of economists’ estimate for a 140,000 gain. The unemployment rate ticked up to 4.2% as the participation rate climbed. 

“The markets will find it hard not to price in more Fed cuts until risk sentiment stabilizes,” said Jordan Rochester, head of macro strategy for EMEA at Mizuho International Plc. “At this stage, I suspect they will be cautious to give too much of a steer for markets given the inflationary issue tariffs may cause.”

Still, Trump welcomed the fall in 10-year yields in comments Thursday. Treasury Secretary Scott Bessent has repeatedly made clear that pushing down that yield — and keeping it down — is a priority for the administration.

European bonds have been swept up in the bond rally, reflecting concerns over the blow to growth from a 20% tariff. The yield on Germany’s 10-year note, the region’s safe asset, has plunged this week, erasing the surge that greeted the nation’s spending plans in March.

Traders also expect the European Central Bank to lower interest rates more sharply, with three quarter-point reductions fully priced in for this year and a chance of a fourth. The Bank of England is also seen easing 79 basis points.

For Mark Dowding, chief investment officer at RBC BlueBay Asset Management, the repricing has already gone far enough. He doubts that both the Fed and ECB will be able to respond to tariffs with monetary easing, citing inflationary concerns in the US and an emphasis on fiscal support in Europe, and is instead looking for entry points to bet against bonds once markets settle. 

“The rally in bond yields appears overdone,” he wrote in a note. “We think the Fed will do nothing for the foreseeable future, as long as there is not a large rise in unemployment.”

The global bond surge even saw sub-zero rates return in some parts of the market. The bid yield on two-year Swiss government bonds turned negative for the first time since 2022.

The Swiss National Bank cut its key policy rate to 0.25% from 1.75% last year, and traders are betting on at least another quarter-point cut by the end of 2025, with some hedging for further easing. Bloomberg Economics estimates US tariffs could reduce US demand for Swiss goods goods by around 60%.

Treasuries have already rallied 3.8% this year, according to a Bloomberg gauge of US debt.

In the US, Fed officials have said that a resilient labor market and sticky inflation mean they can afford to stand pat, even as Trump’s tariffs sapped consumer and business confidence.

“This jobs report is going to create an absolute mess for the Fed response to economic risks,” said Guy LeBas, chief fixed income strategist for Janney Montgomery Scott. “The ‘best’ case for risk assets is that the data deteriorate quickly enough to generate a Fed response. The bad case for risk assets is that jobs muddle through in the face of warmer short-term inflation prints.”

Coming in just a few hours, focus will shift to Powell, who will speak on the economic outlook at a public event. Wall Street will be looking for clues on his response to the latest jobs data as well as careening markets in the wake of the aggressive tariff roll-out.

Economists generally expect that tariffs will lift inflation and slow growth, keeping the Fed in wait-and-see mode. But the debate over the path of interest rates has ramped up after the tariff announcement. While Morgan Stanley now expects no cuts this year, down from one previously, citing inflation risks, UBS Global Wealth Management see more easing this year.

Vineer Bhansali, chief investment officer and founder of Longtail Alpha, said he’s buying two-year notes and selling 30-year bonds, a trade known as a curve steepener. It’s a bet that a slowing economy will force the Fed to lower interest rates, while elevated inflation would lead long-term bonds to underperform.

That growing wager is reflected in the market, with the yield difference between two-year and 30-year bonds has been widening.

“The distribution of possible outcomes has gotten flatter,” Bhansali said. “Anything can happen.”