Treasury yields slide to 2025 low as economic red flags pile up

Treasury yields slid to their lowest levels of the year Tuesday as a recent parade of softening data suggesting the US economy will require Federal Reserve interest-rate cuts this year.

Treasuries were trading near session highs late in New York, with the 10-year yield lower by more than 10 basis points around 4.29%, back at a mid-December level and well inside January's peak of 4.8%.

Evidence that uncertainty over the Trump administration's policies is weighing on households on Tuesday offered the latest driver for yields, which have slumped since mid-January. Traders are once again pricing in two quarter-point interest-rate cuts by the Fed this year.

"Red flags are emerging for the US economy," said Elias Haddad, senior market strategist at Brown Brothers Harriman. "Another month or two of poor US economic data would deliver a blow to the US exceptionalism narrative."

Data released Tuesday showed the Conference Board's consumer confidence index fell more than expected to the lowest level since June. The report was merely the latest sign that the US economy is struggling with inflation and borrowing costs. A Citigroup Inc. index of US economic surprises last week declined to the lowest level since September, indicating that data isn't measuring up to expectations.

Treasury yields declined to new session lows after the Conference Board data, with all benchmark tenors falling at least 10 basis points, and remained near those levels after an auction of five-year notes drew strong demand. 

"The question is whether or not this growth scare is different" to last summer when most Treasury benchmarks fell below 4%, a move "that faded very quickly because you had so much fiscal stimulus taking place at the same time," said Brij Khurana, portfolio manager at Wellington Management. 

Now the fiscal picture looks less supportive for the economy. Economic anxiety has also been stoked by declines in US stocks since the S&P 500 reached record highs last week, with catalysts including a profit warning by Walmart Inc. Ongoing threats by US President Donald Trump to impose tariffs on imports from major trading partners and the Department of Government Efficiency efforts to slash federal payrolls are among other contributors. 

"Even though the amount of dollars that DOGE is finding are not substantial, there are going to be layoffs coming in the government sector," Khurana said. "Half the job growth since 2022 has come from either the government, healthcare, education, all three sectors, which are likely going to be affected by DOGE."

As Trump's policies are implemented, 10-year Treasury yields "should naturally come down" over time, Treasury Secretary Scott Bessent said Tuesday. He also said that he and Trump were focused on "increasing the desirability" of US Treasuries.

Investors flocked to the second of this week's three Treasury coupon auctions despite the drop in yields. The $70 billion five-year note sale was awarded at 4.123%, the lowest monthly result since September and about a basis point lower than its yield in pre-auction trading just before the bidding deadline of 1 p.m. New York time, a sign of strong demand. Monday's auction of two-year notes also drew strong demand despite a rally into the bidding deadline.

Swaps that predict the outcome of future Fed rate decisions are pricing in 56 basis points of easing by the end of the year, up from 48 basis points on Monday. 

Tuesday's price action featured buying in 10-year Treasury options that anticipate a yield decline to around 4.15% by April 25. Bond bullishness also was reflected in JPMorgan's weekly Treasury Client Survey, which found the biggest net long position since January. 

The 10-year yield peaked this year near 4.8% in mid-January, and Tuesday's rally completed a half-percentage-point retreat that some view as excessive. Interest-rates strategists at TD Securities advised exiting the long position they had recommended on Jan. 10 in light of its gain.

"The 10-year will be sensitive to the data and if we do continue to see a little bit of a slowdown, then yields could grind lower," said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. "If the administration is going to cut spending and focus on initiatives that try and get the deficit down, then there is an element of austerity and of the economy slowing."

The 10-year has scope to reach 4.25%, its 200-day moving average, a widely followed trendline, Faranello said. A break below it "could get potentially a little grabby" as investors become concerned about missing a buying opportunity.

The bond rally briefly pushed the 10-year yield below three-month bill yield, inverting that segment of the curve for the first time since mid-December. Historically, inversions have been a precursor of economic recessions, though the most recent period of inversion since late 2022 has not thus far.

Bond traders also are contending with uncertainty about the Treasury supply outlook, which rests in part on Fed balance-sheet policy. The US central bank has been winding down its Treasury holdings, and traders have been anticipating it's preparing to pause or slow down that process as the balance sheet shrinks. Federal debt-ceiling considerations could influence the decision, the minutes of last month's Fed policy meeting indicated.

Dallas Fed President Lorie Logan, speaking on that topic in London Tuesday, said it would be appropriate in the medium term for the Fed to purchase more shorter-term securities than longer-term ones so that its portfolio can more quickly mirror the composition of Treasury issuance, without commenting on the timing of any policy change.